Is Obama bankrupting the country

[admin]

That's what a fellow named Kenkoocksam (doesn't he look faintly familiar?) wrote on Yahoo. Personally, I had given up on Yahoo, and apparently the feeling is mutual, because I wrote a reply but it doesn't show up. Which is really curious, as the reply does exist, but it's hidden from my view (at least) for mysterious reasons only known to Yahoo.

Anyway, here is the reply in full:

Kenkoocksam: [Obama is bankrupting the country.]



He might have done a lot of things you (or even I) don't like, but bankrupting the country isn't one of these.



Go to the CBO, they have a nice graph with the sources of the deficit. You'll be quite surprised..

(click to enlarge)



Then go to today's Financial Times and read Richard Koo's article titled ["Explain the disease to help US citizens"]. Koo has studied Japan for 20 years Japan suffered from a similar crisis (but 3x the size) in the early 1990s and he explains in the article why public deficits are necessary when the private sector (households and firms together) is a net saver (to the tune of 8% of GDP, as it happens now in the US. The article is also available on SHU for easy reference, under 'economy'.



Before dismissing Koo out of hand, you might wanna realize that his model explains (ex-ante, that is, predicted):

- the powerlessness of monetary policy (the private sector is paying off debt despite zero interest rates)

- record low bond yields despite record high public deficits and debts (there is simply excess saving in the private sector)

- non-existent acceleration in inflation despite large QE (no inflation in UK, US, even deflation in Japan itself).

- how Japan, despite suffering from a financial crash 3x the size of US 1929 or 2008, managed to never experience a depression (apart from when they moved prematurely to austerity in 1997)



Compare that with, say, the WSJ editorial page or IBD, who have routinely hyperventilated about rising bond yields or hyperinflation around the corner since 2009, and have still not grasped the essence of what Koo explains is quite simple. When private sector balance sheets are ravished ($9T wiped off due to a 40% fall in house prices) and they react by increased saving, reduced spending, someone somewhere has to spend MORE to keep the economy from falling in the type of debt-deflationary cycle that wiped off 46% of GDP in the US between 1929 and 1933. See what that does for the debt/GDP ratio..

[Spartina]

STP this graph makes no sense - if we are getting out of BOTH Iraq & Afgan. then why does the war cost stay virtually the same through 2019??

[admin]

Actually, that's a fair question. If my eyes don't deceive me, it does get smaller and there are continuing cost (veterans, medical). Part of it is also likely to be the interest paid on the debt to finance the wars. The CBO has a pretty impartial reputation though.

[Spartina]

You're right stp it get's a little smaller but no where near what one would expect when you pull out 99% of your troops. Those other expenses you mentioned pale in comparison to the actual cost of a present time war being waged . I don't trust that chart. I trust you though (smile)

[admin]

Thanks. I'm not sure about Afghanistan, but the war in Irak was not paid out of the normal budget (I remember Bush having to go to Congress quite a few times for funding) so it might have to do with the way these costs are allocated. Also, the projection is a so called 'base-line' scenario from 2011, that is not assuming any policy changes. Perhaps ending the war in Afghanistan wasn't part of the base line scenario (although I doubt that).

It's actually Obama who claims that ending the wars will significantly improve public finances..

[Spartina]

I hope so...

[admin]

I have the 2012 CBO report:

[P7] In 2011, defense outlays totaled $700 billion, an increase of $11 billion, or less than 2 percent—well below the 9 percent average annual growth rate recorded over the previous 10 years. Modest increases in spending for operations and maintenance and for military personnel were partially offset by reductions elsewhere, primarily in procurement. Defense outlays will fall by $20 billion (or 3 percent) in 2012, CBO projects, largely because of a reduction in spending for military operations in Afghanistan and Iraq.

[p17] In 2011, CBO estimates, the number of U.S. active-duty, Reserve, and National Guard personnel deployed for war related activities averaged about 195,000. Under the scenario shown in Table 1-6, the average number of military personnel deployed for war-related purposes would decline over four years: from 115,000 in 2012 to 85,000 in 2013, 60,000 in 2014, and 45,000 in 2015 and thereafter. (Those numbers could represent various allocations of forces among Afghanistan and other regions.) Under that scenario, and assuming that the related funding for diplomatic operations and foreign aid declines at a similar rate, total discretionary outlays over the 2013–2022 period would be $838 billion less than the amount in the baseline.

So CBO doesn't assume complete troop withdrawel, at least not in 2011. Actually, on p70, there is a whole box related to the war spending (too big to cut and paste here), you might wanna get to that. Apparently they have some problems isolating the spending on Irak and Afghanistan:

Because most appropriations for operations in Afghanistan and Iraq and for related activities appear in the same budget accounts as appropriations for DoD’s other functions, it is impossible to determine precisely how much has been spent on those activities.

[ArtM72]

It is also quite possible that the annual increases in defense spending during the decade of the 2000s, by most evidence unfunded, may have contributed to the projected shortfalls being blamed on Obama. I believe this might be what the CBO refers to with respect to the 9% average annual growth.

Here is a link to total defense spending during that period.  The little tale at the end I suspect is the end of Iraq. Unless there is a significant actual reduction in defense spending it remains an unfunded cost.

http://research.stlouisfed.org/fred2/graph/?id=FDEFX,

[admin]

Well, the CBO isn't a controversial organization, really. So I think they have good reasons for the way they accounted for for the war and as far as my (admittedly not terribly thorough, I'm not an accountant, let alone a specialist on American public budgeting practices, and the issue doesn't greatly interest me as I sort of trust the CBO) efforts to try to understand what's going on I think the best explanation is in that box of the linked CBO report on page 70. Apparently there is no clear (enough) distinction between defense spending related to Irak and Afghanistan, and general defense expenditures. So it's cheaper to deploy troops back home or in other basis abroad, rather than have them in actual war duty, but these troops still have to be paid and require facilities.