Monday, October 22, 2018

US Government Budget Cuts From Where?

The tax cuts have driven up the government deficits and are expected to hit $1 trillion (capital T Trillion, yes) next year. This puts more pressure on Medicare, Medicaid and Social Security, which Republican leaders say needs to be trimmed by $1 trillion (capital T Trillion, yes) even before this news.

Recently there’s been some analysis of deficits that the government doesn’t need to worry about them. In fact, there’s a branch of economy called Modern Monetary Theory that suggests that the role of taxes is to just remove money from the economy to keep it from heating up. If you look at the state of affairs that way, one could say the tax cuts are there to heat up the economy and make it hotter than it already is. Unfortunately, corporations didn’t need the money for growth; they had plenty before the tax cuts. Consumers, on the other hand, have increasing debt loads—most of the growth in auto and student loans as a proportion of the overall debt. Whatever tax cuts most people received isn’t helping them balance their household budgets and it’s not the primary source of increased spending; debt has been growing 5-6% while household incomes have grown a paltry 0.4%. That’s a Roadrunner debt to a Wile E. Coyote income.

Add increased debt to rising prices—tariff-related, wage/cost pressure on producers, etc.—and increasing interest rates for mortgages, credit cards, future auto loans, etc. and the economy as fueled by consumer spending could just slow down. And this might exacerbate the government deficit with lower economic activity and lower income tax revenue, tariff revenue and so on.

Recently, in response the President has asked his cabinet secretaries to reduce the budget 5% across the board. (Firstly, businesses know it’s not a good idea to cut across the board because some areas should actually have more expenditures while others take a deeper cut...) But where would that 5% come from if supposedly Defense is exempt from this dictum. The government overspends by 15-16% (7 dollars for every 6 brought in). In order to balance it, we’d have to cut all non-defense discretionary spending: goodbye education, energy, commerce, labor, agriculture, housing departments and, oh yes, justice, EPA, health and so on... Cutting non-defense discretionary spending by 5% saves $30 billion dollars (just b billion)—about 40 days of US Treasury debt interest payments. 5% sounds good but it doesn’t do much. That’s also a kind of Wile E. Coyote response to a Roadrunner deficit.

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