Obama's Budget is a Fantastic Comedy

Fantasy or comedy?  I couldn't decide which way to label the Obama budget, so I went with both.

The bottom line is that the Obama administration has brought forth the most unbelievable revenue increase that I have ever seen proposed in a budget, a whopping 65% increase in revenues in just four years, which will - miracle of miracles - drop the deficit as a percent of GDP from nearly 11% to just 3.2% over those same four years.

The only problem with this scenario is that it stands virtually no chance of actually happening. Revenue will be far lower than projected and the deficit correspondingly higher.

One of my abilities is spotting bogus numbers quickly, and another is to make reasonably accurate projections without a staff of hundreds. For example, in 2009 I called for the Social Security fund to soon begin dipping into negative territory when the CBO was clinging to the illusion that 2017 was the 'below zero' date. Turns out I was right, and it wasn't a terribly difficult call to make. A little trend projection here, some assumptions about early retirement there, a higher and more realistic assessment of peak unemployment, and - voila! - a reasonably accurate projection was made.

Let's look at the recently released Obama budget, which is so far off the mark that no special abilities are required beyond the ability to suppress the urge to chuckle:


The green circles show the rosy deficit-reduction estimates, while the red arrows indicate the incredible 65% increase in federal revenues over a single four year period.  65%! How likely is that? Is it realistic?

Perhaps a little history is in order here. Let's start by asking a question: In any other four-year period, have federal revenues increased by 65% or more?

The answer is yes, but it’s a very qualified yes.

In the first chart below, the red bars show the proposed revenue increases on a rolling four-year basis. That is, each year is compared to the revenue period four years prior. The blue bars are the same, only they represent actual history, not projections while the red bars are the Obama team projections.

The second chart is a comparison to CPI to make a point.

Over the past 60 years, there have only been three other years with a similar or higher rate of revenue growth to the one estimated to occur in 2015: 1979, 1980, and 1981.

There are two things we might note about those prior three years ('79-'81) of rapid federal revenue growth. The first is that those same years represent the second, first, and fourth highest rates of yearly inflation in 50+ years of data, coming in at 11.3%, 13.5%, and 10.4%, respectively.

Does the Obama budget assume similar enormous rates of inflation? Nope. It assumes 2% or less inflation in every year of its projections out through 2015.  So it's not inflation that will be driving the enormous revenue growth.

Another reason we might anticipate extremely strong revenue growth is because of a rapid expansion of GDP.

Here again in 1979, 1980, and 1981, we saw something very unusual in the data: Those years clocked exceptionally robust GDP growth at 11.7%, 8.8%, and 12.1%, respectively.  Out of 65 years of data, those were the 4th, 5th and 17th fastest years of economic expansion.

Could that be the driver behind Obama's optimism? Is his team calling for double-digit GDP growth over the next few years?  Do they envision 'top ten' like performance for a couple of those years?

Not according to their published data.

So we can't really defend the projected increase in revenues on the assumption of massive economic expansion either. The Obama team does predict a pretty decent expansion - but on a relative basis, it's nothing spectacular and is less than half that which drove the revenue expansion in the 1979-81 period. 

So the 65% revenue increase will not be driven by either inflation or GDP expansion.

What if we compare the projected increases historically on an inflation-adjusted basis - would that put them in a better and more believable light? 

In this next chart, we simply chart each year's federal revenues after correcting for CPI (we used the Obama budget CPI assumptions for the years 2011 - 2015 to discount the future so everything is in 2010 dollars).

Are these numbers any less fuzzy? Nope. Even on this basis the proposed revenue increases are the largest on record, bar none.


There is almost no chance of the Obama revenue projections coming to pass, unless massive tax increases are part of the deal, and as far as we know, they aren't.

The only other alternative is that the United States might enjoy some pleasurable combination of quite rapid growth, a fall off in unemployment to match, tidy increases in wages, and a low CPI.  But the probability of all of these coming to pass is very, very low (although I will admit that they must be very appealing to an incumbent. Appealing? Yes. Likely? No.)

Here's my prediction; we'll have sub-par growth in 2011 and relatively weak growth in 2012, with a 50% chance of a double-dip appearing in one of those years. As such, revenue growth will be slightly below average between here and 2015.

Using these assumptions, and generously assuming that things more or less carry on as normal and even more generously that the economy magically grows to $19 trillion as the Obama team has assumed, the actual budget deficit will be no less than 8% of GDP each year between here and 2015.

My estimates translate into a roughly $1.5 trillion cash deficit each and every year -- give or take a little -- digging our national debt hole deeper by another $7.5 trillion by 2015.  

This, however, is merely my starting bid. I can easily envision deficits that are far higher in both aggregate and percent-of-GDP terms, due to some combination of rising energy prices and debt overhang dragging the GDP figure downwards, and rising interest rates driving federal costs higher.

The bottom line is that either this budget is a fantasy, or I am completely wrong and we somehow set historical records for revenue growth during a time of low inflation and below average GDP growth.

It is against this backdrop that you should be especially dismissive of any and all partisan rhetoric that proposes to reduce the deficit by trimming this or that program by a few billion here and there. Until and unless you hear about cuts to the big four - Defense, Medicare, Medicaid, and Social Security - you can be certain you are merely listening to partisan talking points aimed at posturing for the next election, not credible plans for attacking the root of the problem.

The US is facing a deficit pattern (deficits higher than nominal GDP growth) that has ruined many a country before. A failure to legitimately address this condition before being forced to do so by global or market circumstances will lead to a far rougher period of adjustment than necessary.  Such a failure even risks it all: a sudden loss of reserve currency status for the US that leads to a sudden repatriation of some $7 trillion in US-dollar-denominated assets currently held off-shore.

Said simply: The risk is a massive inflationary event that forces the Fed to choose between defending the dollar (by raising interest rates) or defending the US economy. It can't do both at the same time.

This is a companion discussion topic for the original entry at https://peakprosperity.com/obamas-budget-is-a-fantastic-comedy-2/

Scary stuff!!!

And early on, the MSM is reporting the whole thing with a straight face!!  Aren’t there any MSM journalists who are pushy, skeptical and want to make a name for themselves!  Isn’t that the American way?  Do any of the journalists have a calculator.  Oh well, we can always hope some hard-hitting investigative reporter will EVENTUALLY point out the absurdity of the President’s proposal.  Or am I being too optimistic?

Scary stuff, indeed.  But surely Obama himself did not do up these figures.  I know he is a smart man, but I dont his specialty is economics.  Who are the responsible parties in his administration who did put this together? 

In the UK, they talk of “jam tomorrow” in that “today we’ve just got bread, but we will have jam tomorrow”.  Of course the situation never changes…
It seems beyond any politician to speak the truth as to what is happening to their country or the world.  I wonder who the politicians/society will find to blame? 

Thanks for cutting quickly through the bull… er…fog for us, Chris! 

My response to Obama (actually written before his budget based on speculation I read about what it would look like): Dear Mr. President

You are absolutely right about the Big 4.  We are not going to be having a meaningful conversation about the budget until these sacred cows are put on the table – everything else is essentially chump change.
Discretionary spending only accounts for 1/8 of the federal budget.  See http://www.concordcoalition.org/press-releases/2011/0214/concord-coalition-says-presidents-proposed-budget-falls-short-entitlement-a

It seems we are going to have to have another financial calamity before people will start getting serious about this.

I’m actually noticing open discussion in the mainstream media that the proposed budget cuts don’t go nearly enough;  the information is clear, but the average person doesn’t seem to be taking it seriously or taking time to understand it.  Perhaps not enough pain has been felt yet.
"Deficit is biggest as share of economy since 1945


GOP Denounces Absence of Entitlements Overhaul


Deficit Would Stay High for Years to Come


Check out the interactive graphs in the link above.  How does they come up with the sudden rise in revenues the next few years?!?


Was the CPI more credible in '79?  Maybe that’s where the inflation needed to increase revenues will be hiding.  

[quote=macro2682]Was the CPI more credible in '79?  Maybe that’s where the inflation needed to increase revenues will be hiding.  
Well, that certainly has to be part of it.  I recently interviewed John Williams (coming soon) and I really think his CPI numbers are far more accurate.  He’s currently sitting around 5% with his alternate assessment of inflation, and I suppose a doubling from there to the levels of the 70’s is not out of the question. 
However, a big portion of the 70’s-style inflated revenues was due to the wage portion of the wage-price spiral.  This time there’s almost no chance of a wage spiral due to a variety of pressures including the fact that we lie to ourselves about inflation and so companies are given cover to deny wage increases.  “Hey, sorry, but inflation is really low and so we are going to hold off on any wage increases right now…”
And as far as the budget cuts, just blur your eyes a bit and take in this chart…and the futility of targeting the non-defense discretionary piece of the spending will be revealed:
To this I would only comment that if interest rates do not behave over the next decade that the black portion, net interest costs, could easily grow to be larger than both the green and the red portions combined.  Chew on that for a minute…and then wash it down with a nice Greek wine.

[quote=Dragline]You are absolutely right about the Big 4.  We are not going to be having a meaningful conversation about the budget until these sacred cows are put on the table – everything else is essentially chump change.[/quote]Here is a speech from our ex-governor Gary Johnson at CPAC.  He was really great in our state and is not afraid to tackle the issues. I would love to know what he would say about Peak Oil.  Anyway, it was a speech at CPAC so it does have a strong political Republican oriented tone:
A quote from the speech:

There is no kicking the can down the road anymore, we have to slash government spending. I advocate balancing the federal budget tomorrow.  And that means cutting 1.5 trillion dollars from the budget because that's 43% of the federal budget.   And to do that you've got to start out by talking about Medicaid and Medicare and Social Security and defense.

These projections would be quite the trend reversal!


Two thoughts:
1.  As far as my eyes can tell, the discretionary green bits don’t noticeably shrink YoY on that chart.  So even the “tough cuts” they’re making aren’t material.
2.  When I think about rising interest rates (the black growing larger than the green + red), Greek wine ain’t gonna get the “cheer me up” job done.  Somebody get me some Ouzo.  And a vigorous shoulder massage and some soothing music…like “Bulls on Parade” by RATM.
Viva anyway – and thanks for the scouting report – Sager

"WASHINGTON -(Dow Jones)- U.S. President Barack Obama's fiscal 2012 budget plan projects that the U.S. Treasury will receive slightly more in payments from the U.S. Federal Reserve in 2011, a remittance that could help cut the budget deficit.

The Fed’s income has surged due to a boost in earnings from securities it acquired during the financial crisis and its aftermath.

Budget documents that the Obama administration unveiled Monday note that, in 2010, the Treasury received $75.8 billion from the Fed. The budget plan goes on to project that the Treasury will receive $79.5 billion from the Fed in 2011 and $65.8 billion in remittances from the Fed in 2012."

Would there be any growth in manufacturing? Oil production? Natgas? Coal? Other mining? Farm produce? Sustainable energy? Any goods or services sold to other nations? These would result in wealth creation or wealth transfer into the United States. This is where the increases have to be to accommodate high growth. I don’t see it in 10 years, let alone 4.

Adding jobs in most any other service sector will never account for a sustainable increase in revenue collections.

The only other way to facilitate this kind of growth in revenue is in inflating the value of the currency - could be what they believe?

I probably would have gone with “Comedic Fantasy”. Wink
Thanks for making the obvious even more clear for us Chris.

I am starting to get a kind of funky, depressed resignation when tripe like this budget, substitutes for problem solving. It’s like we have just been diagnosed with late stage cancer, and we are planning an audition on American Idol.
At this late stage, even if their was widespread understanding of the problem, and agreement to slash the big 4, I don’t think this is fixable.  Even if by some act of God our government decided to eliminate the deficit entirely in 2011, the subsequent economic contraction, rioting in the streets, etc. would offset any gains made to our solvency.  More deficits add to the debt and printing that must follow.

Under these conditions, I think I actually feel sorry for ol’ Ben.  What choice does he have?  Any action he takes at this point (that would be responsible), would lead to a catastrophe.  His only real choice is one of timing:  pain now or pain later.  Thanks to Dan Ariely’s work, we know the answer to that one.

The writing is on the wall.  There is no set of events that can right the ship at this point.  One way or another, we are going to enter the dark, cold, oily water.

I wonder: how long will I have to wear this life vest before we capsize?  I am tired of explaining it to people.

Less depressingly:  early this week at a gathering of 30 friends, we had a group discussion about what exactly we were going to do with ourselves as a group.  This had NEVER happened before.  I finally have their attention and fielded calls this week ranging from PV systems to food storage.  We are getting organized just in time. . .


The president’s budget is, as always, a purely political document.  The executive branch has no responsibility nor authority to create a budget.  That power belongs solely to congress.  Congress, and only congress, decides how much gets spent and on what.  The White House budget is always a political propaganda tool, that, at most, seriously lays out the executive branch’s priorities, and, more often, simply aims to be just credible enough to get some good mainstream media commentary.  In this case, Obama is trying to say, “I’m proteting the middle class tax cut, making modest and reasonable cuts or spending freezes, and generally acting like a responsible adult… nothing radical that’s going to really hurt.”  The whole message is meant to play in the mainstream media.
In reality, what he is saying is, “There’s no way I’m getting out in front of cuts to Defense, Medicare, Medicade and Social Security. My mother didn’t raise any stupid children!”   He just tossed the ball over the fence to Congress where it belongs, and where it will be yakked and yammered about endlessly while doing almost nothing.  Those guys are politicians, too, and they don’t want any part of the Four Horsemen any more than does Obama.  They will gut small discretionary programs (you know, the a lot of ones that actually do some good) like home heating oil assistance and then they will restore them as soon as the media reports on New Englanders freezing to death hit the media, just like they have done before.  This is how our government runs itself now.

You want a reasonably good bet… I think there is an excellent chance that the US does not operate under a budget for any fiscal year before 2014 (the first fiscal year after the next major elections), but instead continues to do as they are now… operate on a series of continuing resolutions, each of which is used by both parties to hammer the other’s position.  In short, I expect them to kick the can down the road until a true crisis causes the public to rise up and demand action.  Unfortunately, by then the situation is likely to be so dire that one of two things will happen:  1) any responsible behavior will be considered Draconian and may, even then, be politically impossible, resulting in a continuing or even growing crisis or 2) any meaningful response will generate enormous pain for the nation and the 90% of its citizens who have only a small share of the nation’s wealth.

Does anybody really see these fools getting out in front of these issues?  I just don’t.

[quote=bsm20]Does anybody really see these fools getting out in front of these issues?  I just don’t.
No.This country needs vast quantities of 10 dollar oil, an atmosphere capable of absorbing the pollution, and 4 dollar a day labor to get “in front of these issues”.
The entire government structure is made up of non-producers interested in keeping their positions of power, influence, and income. When push comes to shove I believe is when they force draconian measures down the throat of the populace. Those people will do whatever it takes to fulfill their dreams of an easy retirement (which is going to be impossible).