Wall Street Journal: What Austerity?


Wednesday’s Wall Street Jouranl contained an editorial piece titled “What Austerity?”

The very pointed piece starts like this:

With the recovery sputtering, the White House and its allies have been blaming government spending cuts, or what the neo-Keynesians call “fiscal contraction.” This is a dubious economic theory even if spending were being cut, but yesterday’s mid-year report from the Congressional Budget Office shows definitively that there’s been nothing close to contraction in Washington.
That’s the real news in the CBO numbers, which show that spending in fiscal 2011 (which ends on September 30) will hit a new high of $3.6 trillion, up $141 billion from 2010. That’s higher than the previous record in 2009 of $3.5 trillion, which was supposed to be the peak of the “temporary” stimulus spending.

Ouch. Did you realize that total federal outlays have increased by about one-third in just four years, something unmatched since the “Great Inflation” of the 1970’s.

The piece continues:

Give President Obama and the two Pelosi Congresses credit for this much: They said they would spend our way out of recession, and they sure gave it the old Beltway try. The problem is that we got the spending without the promised economic growth.

Double-ouch. Spending is up again, and while there are relatively modest increases in military spending (and make no mistake – defense spending absolutely needs to be scrutinized) the biggest increases are “Medicare, Medicaid, and the usual panoply of entitlements and other payments to individuals.”
Referencing the recent CBO report, the authors point out that the slightly sunnier picture (very slight) is “based on assumptions that will never come true.” It assumes, they said, that federal spending will suddenly come to a screeching halt and grow by only $12 billion in 2012. Right. Both Obama and the Demorat-controlled Senate want to INCREASE spending.
They continue:

The rest of CBO’s fantasy forecast comes from what it says will be “the sharp increases in revenues that will occur when provisions of [the Bush era tax cuts extended last year] expire.” So CBO estimates that federal taxes as a share of GDP will leap to 19% in 2013 and 20.2% in 2014 from 15.3% today. And we are supposed to believe that economic growth will soar to 4.4% and 5% in 2014 and 2015 after huge tax increases on capital gains, dividends, small businesses and workers in 2013. Beam us up, Scotty.

The editorial concludes like this:

The real story told by the CBO report is that the federal government is still pursuing a very loose fiscal policy, despite lamentations from Democrats and the Keynesian economists who populate Wall Street. The best that House Republicans have been able to do so far is to battle Mr. Obama and Senate Democrats to a draw, delaying tax increases until 2013 and preventing even larger spending increases. To really control Washington’s appetites, the voters are going to have to back up their message in 2010 with reinforcements in 2012.

I couldn’t agree more.


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14 Responses to “Wall Street Journal: What Austerity?”

  1. cedarlegal Says:

    Thanks for the post Holly. I read this in the Journal as well. I like your breadth of topics. Seems like we need to be teaching why Keynes was wrong. George Wythe University in Cedar City is teaching a course on Murry Rothbard’s Man, Economy, and State this Fall Semester. I think all fiscal conservatives could use a primer in real economics.

  2. Ronald D. Hunt Says:

    “That’s the real news in the CBO numbers, which show that spending in fiscal 2011 (which ends on September 30) will hit a new high of $3.6 trillion, up $141 billion from 2010. That’s higher than the previous record in 2009 of $3.5 trillion”

    Number games here, if we properly take into account year to year inflation then a flat line for federal spending would actually be a dollar increase of between $72 billion(at 2% inflation) and $126 billion(at 3.5% inflation).

    This article plays funny games with numbers, mind you I only get to see the bits your posted as their is a pay wall to view the entire article!

    “So CBO estimates that federal taxes as a share of GDP will leap to 19% in 2013 and 20.2% in 2014 from 15.3% today.”

    You know that “Stimulus” package you keep crapping on?, well the Bush tax cuts are not the only tax cuts that expire, a good 40% of the stimulus package was also tax cuts($300~ billion or so) and they will expire as well(Obama practically wiped out corporate income tax liability for the 2010 year for many corps), You also have the payroll tax cut that Obama got in the budget deal that expires($140 billion per year right their fyi).

    “Double-ouch. Spending is up again, and while there are relatively modest increases in military spending”

    Medicare cost growth from 2001 to 2011 is up around 132%, Military cost growth from 2001 to 2011 is up around 177%. Care to rephrase?

    Even if you look at just recent numbers, according to CBO medicare payouts are increasing by less then 4%(vastly below the 6.7% year to year increases in private plans) per year now, Clearly showing that Obamacare is having a positive effect in this area and their are still more reforms yet to be implemented that will improve things further. And I am not even talking about the disaster that is Medicare Advantage the ill thought out Bush era privatization scheme that has been a fiscal nightmare for the government costing them as much 140% that of a standard medicare recipient, As Obamacare levels this off the savings will improve greatly(this starts happening in fiscal year 2012).


  3. markg91359 Says:

    Well let’s see George W Bush started something called a War in Iraq back in 2002, that has consumed over a trillion dollars of government spending and you know what? Not one conservative I know of even acted like that might be a mistake. Nowadays all the conservatives try as hard as they can to forget that chapter of our history.

    Its only when spending is put in place to help the unemployed, rebuild infrastructure (while providing jobs to the unemployed), or consists of payroll tax cuts that actually help the poor and middle class instead of the top 1% of earners in this country that the right wing becomes outraged.

    Tea Potty supporters are one twisted group.

  4. rmwarnick Says:

    According to PolitiFact, if you don’t count payments to individuals (e.g. Social Security, Medicare and food stamps) it turns out that ACTUAL government spending as a percentage of GDP is less today than in 1963.

  5. hollyonthehill Says:

    But RM, you MUST count Social Security, Medicaid, and Medicare – and yes, food stamps too. You can’t ignore huge chunks of our budget and than say “well, we’re spending less”.

  6. Ronald D. Hunt Says:

    Private industry doesn’t follow the same standard for adding the numbers up with banks and insurance companies Holly, We should definitely add the cost of administrating those programs(SS, Medicare/caid, and foodstamps).

    But just like a bank or insurance company paid benefits are not the “companies” money it is simply money that is manged by the company(well government in the case but same idea).

    Said another way, Banks don’t declare savings account withdrawals as spending on their part, neither should social security or medicare with benefits paid out.

  7. Greg Says:

    RM and Ronald,

    I was tempted to laugh until I realized that your arguments are serious.

    Are you really suggesting that when you find the consequences of your actions (massively bloated government spending, unbridled entitlement spending) unpleasant it is OK to just pretend they are not there?

    Do you really believe the answer to eliminating our deficit is to redefine expenses (like Bill Clinton redefining the meaning of word “is”)? All we have to do to balance our budget is declare expenses are not expenses and we no longer have to pay for them?

    Comments like these give the appearance of childish naivete or intentional deception.

  8. Ronald D. Hunt Says:

    social security has its own revenue separate from the rest of government in the form of the FICA payroll tax and as such is not responsible for a single cent of our current deficit. I will also point out that Medicare also has its own dedicated tax in the FICA payroll taxes as well, However unlike SS medicare can cause deficits(mind you its in the clear until 2029,(as of the last report by the trust fund which has yet to be weighted for the real result from Obamacare)).

    However the medicare problem isn’t just a medicare problem it is an health care industry wide problem, Either way its is not causing the current deficit.

    The current deficit can easily be fixed by cutting the real drivers of that deficit, any of the $2 trillion dollars in tax expenditures(you know deductions,credits,write-offs,subsidies, etc), the amazingly bloated defense budget($1.1 trillion), or raising taxes(big driver of our deficit is the Bush cuts)(we have been lowering them for 40 years now and that better “conservative” economy just never showed up, in fact it has only gotten worse).

    And to be clear without Bush, the Clinton surplus would have paid off the inter agency debt as well. It simply confounds me that their are so many conservatives who don’t see lowing taxes while going into 2(3 now) wars as a problem. To say nothing of the actions of their political leaders creating the Medicare drug benefit for the sole purpose of preventing growth in seniors crossing the border to Canada to a country that negotiates drug prices on a national scale for massive savings. Or for the idea of drug reimportation to take off and kill pharma profits(and save the government a giant amount of money).

    But right right, Greg lets not solve real problems, let recklessly cut things without regard for what they do, separation in funding sources, real causers of deficit, or whatever else standard is appropriate measure for the situation.

  9. Greg Says:

    Entitlements consume a greater percentage of national and state budgets every year. No amount of “redefining” or rationalization changes that simple fact. We cannot sustain the rate of increase in entitlement disbursements. Any statement to the contrary is misinformed or deceitful.

  10. Ronald D. Hunt Says:

    Your confusing yourself Greg, Their are 2 separate deficit problems that need fixing, that is the short term deficit driven by the wars, economic downturn, unemployment, stimulus, bailouts, and the Bush tax cuts. And then their is the long term deficit driven almost completely by the cost of health care in this Nation.

    The short term problem fixed of course by allowing the Bush tax cuts to expire, fixing our broken abusive “free” trade policies. how we tax corporate foreign profits, and other general reforms(mostly ending a bunch of the tax loopholes/deductions/credits/etc), allowing the wars to wind down and end, cutting the bloated defense budget, and generally improving the economy.

    The long term deficit is a more complicated issue, we need to reform health care financing to solve this one, an All-payer or single-payer(medicare for all) system that uses bulk payments, global budgeting and has no need for administrative work to weed sick people out or play musical chairs with benefit eligibility. This would also be a giant boon for the economy as it would lift the $600-$700 a month premium off of many people and put real spendable money in their pocket, this would be giant job creator.

  11. Greg Says:

    Classic progressive response. State questionable assumptions as if they are fact and attack anyone who does not accept your position.

    I stand by my assertion – you cannot balance a budget simply by redefining “expenses” and claiming they no longer count.

  12. Ronald D. Hunt Says:

    Simple time to doubling formula or “(natural log of 2) / growth rate”, we can use this to make a clear projection of how fast something doubles in cost given a certain rate of growth.

    for private health insurance,..
    a growth rate of 6.7%,

    ln(2)/ 0.067 = 10.34548031

    for Medicare
    a growth rate of 3.9%
    ln(2)/ 0.039 = 17.77300463

    for better understanding this means that in 10.3~ years a private plan will cost double and in 20.6~ years will cost quadruple, and in 30.9~ years it will cost 8 times as much.

    The same follows for Medicare, in 17.7~ years double, 35.4 years quadruple, and 53.1 years cost 8 times as much.

    Both growth numbers can be found in the latest SSA reports or from that link I posted above. But we can clearly see that the cost doubling rate of private health care plans is much higher then Medicare and that both growth rates are a disaster.

    At current growth rates(which are actually going up in private plans) the cost of a private health insurance plan will be more then the median wage in the United States of America by the mid 2030’s.

    I have laid out clear policy options that would improve the situation and solve the deficit problem on both fronts. But either way our hand is going to be forced on the health care issue soon, high deductible plans are eating themselves from the inside due to people delaying treatment, and band-aid patches such as Obama care only help marginally.

    “State questionable assumptions as if they are fact and attack anyone who does not accept your position.”

    Was not meant as an attack, even the big wig conservatives sort the deficit problem into short and long term issues to be solved in different and separate ways.

  13. Greg Says:


    You still have not conceded the fundamental truth that using accounting gimmicks such as declaring that an expense isn’t really an expense does not solve any deficit problems, long or short term.

    If we cannot agree on some simple ground rules such as:

    * no hand-waving
    * no outright fabrications
    * no account gimmicks

    Then we have no foundation for a discussion on what our financial problems are and how we can best resolve them.

  14. Ronald D. Hunt Says:

    accounting gimmicks?, SS is a deposit holder similar to a savings and loan bank(but without the fractional reserve multiplier of a bank). Just like a bank they receive deposits and disperse deposits, Their expense’s are the administrative cost of managing this and like a bank withdrawals are merely the return of managed dollars not a cost of dollars from outside the managed assets.

    To be further clear on this, by current social security law when the trust fund is exhausted social security will lower benefits to that of incoming tax revenue(around 78% of promised benefits under the worst case scenario). SS WILL NEVER CAUSE A DEFICIT UNDER CURRENT LAW.

    Last year social security had around $850 billion dollars in revenue, in fact almost half of last years “total” federal revenue was for the social insurance programs. Now I use air quotes here because the social programs have their own revenue that is separate from the rest of government in the form of the payroll taxes. That is $850 billion dollars of real money, no gimmicks, no hand waving.

    Now Medicare of course is somewhat of a different story, as pointed out above the cost problems with medical care are industry wide and not just a medicare problem. The high growth of medical care has been going on like clockwork for years and years, and well before most people would think. The modern system is mostly an outgrowth from wages being frozen during world war 2, companies would use benefits instead of wages to lure potential employee’s or as an alternative to wage hikes. Nixon created the legal framework that “managed care” works under. explosive costs in emergency care lead to the 1964~(might beoff on the year) ambulance act made it illegal for an emergency room to turn away patients without first stabilizing them(often prior “poor” looking patients would be turned away for fear they couldn’t pay, and even if they could often emergency patients are unable to communicate this) .

    Then of course the passage of Medicare and Medicaid, and mind you these help keep medical care prices down as they greatly lower the amount of uncompensated care that is given by doctors and hospitals. Even with Medicare and Medicaid a 20% of care is still uncompensated.

    And as crazy as that is for any industry to have a 20% lose ratio(name me another business that could afford this), that still isn’t the largest cost in medical care, A full third of every medical dollar is spent on private insurance billing, administration, and profit. The average doctor has 4 personal just for private insurance billing, the average hospital has an average of 1 administrative personal per bed for private insurance billing. Just Aetna alone has around 450,000 employees(compare that to Canada’s system that operates their national insurance with around 5,000 employees).

    Ignorant slash and burn governance won’t solve our problems. We can’t cut our way out of this problem, We can’t “deregulate” our of this problem, The Reagan and Bush jr. solution of creating a credit bubble to hide the real problems with their economic policy won’t work either from out current position it will be probably another 5-10 years before the banking system is able to start leveraging in an upward direction again.

    We are probably set for a few years of stagflation(well stretchflation actually as we are in a weird situation where the volume of dollars is decreasing but we still have price inflation) or if the fed is disabled in anyway deflation, we have to fix the inequality in the distribution of income to truly fix our economy in the long run.

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