Tuesday, February 2, 2010

Stein's Law

Perhaps the most profound bit of information appearing in the news this morning concerning the budget proposal of the Obama administration is the citation of Stein’s law by the economist James Galbraith in the New York Times article “Huge Deficits May Alter U. S. Politics and Global Power.” (See David Sanger, http://www.nytimes.com/2010/02/02/us/politics/02deficit.html?hp.)

Stein’s law (as familiarly presented) states that “If a trend cannot continue, it will stop.”

Galbraith also provides us with his own wisdom: “Forecasts 10 years out have no credibility.”

Now to the budget of the United States government!

What is the primary trend connected with the federal budget? Government expenditures will go up, and up, and up. Congress does not have the discipline to stop expenditures from increasing. Neither do presidential administrations.

But, what about the deficit?

There is only one way the deficit can or will be reduced: revenues coming into the government must increase. And, of course, they must increase at a faster pace than expenditures are growing.

This was the pattern in the Clinton administration years, 1993-2001. For this 8-year period, total receipts coming into the federal government rose 7.1% per year. (Note that for the 7-year period of 1993 -2000, the annual rate of increase was 8.4%.)

This contrasted with the compound growth rate of total federal government outlays which rose by 3.6% per year. Thus, the Clinton administration began in fiscal 1993 with a total deficit of $255 billion and recorded a surplus in fiscal year of 1998 of $69 billion, followed by surpluses of $126 billion, $236 billion, and $128 billion.

The major contributors to the growth rate in total receipts was Individual income taxes and Social insurance and retirement receipts. The compound growth rates of these items was 8.7% and 6.2%, respectively. Note that the compound growth rate for real GDP during this time period was 3.5%.

The figures for Bush 43 show a substantially different configuration. Total receipts of the federal government grew by only 3.6% per year during this administration. (Note that the compound growth rate for real GDP was 2.3% at this time.) The greatest growth in revenue came from corporate income taxes which grew every year by 10.5%

There was a surge during the Bush 43 years of total outlays which rose by 8.3% year-after-year. The biggest contributor to this was the outlay for national defense, and these expenditures rose, on average, by 10.2% every year. (Note that in the Clinton administration these outlays rose by less than 1% per year.)

It seems to me that the trend in outlays over the next few years will remain rather high. America is a nation at war! Defense outlays will continue to rise. The question is, how much? This is a unknown known. My guess here is that present estimates are low!

The big question relates to how much other expenditures will rise, expenditures related to health care, energy, global warming and others. The exact cost of this spending are anyone’s guess right now. These expenditures we can put in the category of known unknowns. Given the history of government it is impossible for me to believe that health care reform will not “cost us one dime” as stated by the President. We don’t really know when these other programs will be pushed and expanded, but they still remain on the “to-do” list of the President.

There are always “other” things, the unknown unknowns. You guess.

The trend in outlays is up, but the question is by how much? The mean of the Clinton and Bush 43 years is just about 6% per year!

Is there any way that revenues can come anywhere close to a 6% per year annual increase?

It was done in the Clinton years, but that was with an economy that was increasing, in real terms, at 3.5% compound rate. I just don’t see it over the next 5 to 10 years.

Raising taxes? Are you crazy!

Yes, the Bush 43 tax cuts will not be renewed, but, there will not be any other tax increases that will raise revenues substantially. Not with the unemployment figures captured in the current budget document.

So, what are we faced with?

Given the scenario I have just painted my guess for the sum of government deficits over the next 10 years is from $15-$18 trillion. This is substantially above the $8.5 trillion total presented in the current Obama budget documents.

If this scenario for the federal budget is anywhere close to reality then one could argue that it is the blue-print for an excessive credit inflation in the upcoming years that will be unlike anything we have seen in the past in the United States!

And, what is the good news?

To quote Galbraith, “Forecasts 10 years out have no credibility.”

Whew! You had me scared two paragraphs ago.

Any more good news?

Sure, to quote Herb Stein, “If a trend cannot continue, it will stop.”

The trend commented on above is the growth of total federal government outlays. It must stop! But, it will not stop if the United States is fighting at least two wars, fighting unemployment, fighting for health care reform, fighting for other “musts” on the Presidential “to-do” list, and taking care of those unknown, unknowns that always seem to pop-up.

“If a trend cannot continue, it will stop!”

What is going to make the trend in total federal government outlays stop?

I’ve got my ideas. You go ahead and write your own script!

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