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This Year's Real Deficit Is...$11 Trillion

By David King Published: August 9, 2012

I read an article by two Bloomberg economists that immediately caught my eye with this opening line:

Republicans and Democrats spent last summer battling how best to save $2.1 trillion over the next decade. They are spending this summer battling how best to not save $2.1 trillion over the next decade.

This encapsulates perfectly how our federal government works. Congress makes a big hullabaloo about enacting spending cuts...and then figures out ways to wriggle out of them. Whether they call it a debt celing deal, sequestration, Paygo, or whatever, the same scenario plays out over and over again. The cuts never happen, and spending goes up, up, up.

But that is only a symptom of a much larger problem, a problem known as the fiscal gap. Here's a brief description:

The fiscal gap is the present value difference between projected future spending and revenue. It captures all government liabilities, whether they are official obligations to service Treasury bonds or unofficial commitments, such as paying for food stamps or buying drones.

And how is America doing with this fiscal gap ??? Worse than you could ever imagine:

In the course of [the last] year, the U.S. government’s fiscal gap -- the true measure of the nation’s indebtedness -- rose by $11 trillion.

These Bloomberg economists just told us the real federal deficit over the last year is $11 trillion. I don't know about the rest of you, but that sounds like a serious problem to me.

The news gets much worse:

The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast -- the Alternative Fiscal Scenario -- is now $222 trillion. Last year, it was $211 trillion. The $11 trillion difference -- this year’s true federal deficit -- is 10 times larger than the official deficit and roughly as large as the entire stock of official debt in public hands.

Our intrepid politicians, as they roll merrily along condemning each other, never mention this $222 trillion figure. I'm not surprised, because they'd probably be tarred and feathered if they did.

For the last decade, we've been adding to the fiscal gap by giant leaps and bounds:

In 2003 and 2004, the economists Alan Auerbach and William Gale extended the CBO’s short-term forecast and measured fiscal gaps of $60 trillion and $86 trillion, respectively. In 2007, the first year the CBO produced the Alternative Fiscal Scenario, the gap, by our reckoning, stood at $175 trillion. By 2009, when the CBO began reporting the AFS annually, the gap was $184 trillion. In 2010, it was $202 trillion, followed by $211 trillion in 2011 and $222 trillion in 2012.

For you partisan bean counters out there, that means $38 trillion has been added to the fiscal gap on President Obama's 3 1/2 year watch, and over $100 trillion on Bush's 8-year watch. I guess this is what Obama would call, "things getting better", but I've pretty much given up on making any sense out of what Obama says. He must have a different dictionary than I do, because it seems to me that things are getting a lot worse. If Obama really wanted to change Bush's "failed policies of the past", it would be helpful if he didn't follow those same exact policies, you know ?

Here are some of the reasons the fiscal gap is widening so rapidly:

Part of the fiscal gap’s growth reflects changes in policy, such as the Bush and Obama tax cuts, the introduction of Medicare Part D, and the expansion of defense spending. Part reflects “natural” growth of existing programs, including growth in Medicare and Medicaid reimbursement rates. And part reflects the demographic time bomb U.S. politicians are blithely ignoring.

When fully retired, 78 million baby boomers will collect, on average, more than 85 percent of per-capita gross domestic product ($40,000 in today’s dollars) in Social Security, Medicare and Medicaid benefits. Each passing year brings these outlays one year closer, which raises their present value.

Governments, like households, can’t indefinitely spend beyond their means. They have to satisfy what economists call their “intertemporal budget constraint.” The fiscal gap simply measures the extent to which this constraint is violated and tells us what is needed to balance the government’s intertemporal budget.

Now comes the really bad news. We HAVE to fill the fiscal gap somehow. That won't be pretty, and few politicians have the nerve to face the issue and be honest about what it will take to fix this mess:

Closing the gap using taxes requires an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the U.S. needs to cut, immediately and permanently, all federal purchases and transfer payments, including Social Security and Medicare benefits, by 40 percent. Or it can mix these terrible fiscal medicines with honey, namely radical fiscal reforms that make the economy much fairer and far stronger. What the government can’t do is pay its bills by spending more and taxing less. America’s children, whose futures are being rapidly destroyed, are smart enough to tell us this.

As I've stated repeatedly, America is living in an artificial, debt-fueled economic fantasy. It is a house of cards that cannot stand over the long run. Unfortunately for us, we have too many short-sighted politicians who look to prop themselves up by handing out goodies (spending) to the electorate like candy in order to win the next election. They are easy to identify. They call themselves Democrats...and during the Bush years they called themselves Republicans too. That was and is a recipe for disaster.



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