There’s a chorus of calls from Democrats, like Ohio’s Sen. Sherrod Brown, telling us that Seniors shouldn’t be held liable for Washington’s overspending. They insist that there shouldn’t be any significant changes in the Medicare or Social Security programs. But many of these same Democrats have been voting against any significant efforts to control spending as long as they have been in Congress.
Ohio’s Sen. Sherrod Brown is a good example. He was first elected to the U.S. House in 1992. At that time the budget included spending of less than $1.4 trillion and debt of $4.0 trillion. We are expected to have $3.8 trillion in spending and close to $15 trillion in debt by the end of fiscal year 2011. Where have his consistent protestations and concrete suggestions regarding solutions been? I don’t remember them.
Sen. Reid and Durbin, the Democrats top two leaders of the U.S. Senate, are better examples. They were first elected to Congress (the House) in 1982. We had an annual budget of $0.7 trillion and debt of only $1.1 trillion that year. They voted against the BBA in 1997 and have consistently voted against any attempt to roll back any part of President Clinton’s call for a “temporary sacrifice” by the wealthy back in 1993!
But even worse has been how the two of them have denounced any effort to create a solution for Washington’s over spending. They each have told us to leave Social Security alone. They’ve told us Social Security isn’t part of the budget, doesn’t add to our deficit and is solvent for at least 20 years. But I’m confused. If what they are telling us is true, how is it that President Obama isn’t sure that seniors can get their checks UNLESS the debt ceiling is raised? It turns out Social Security is in the budget. It is projected to add $1 trillion in deficits over the next 10 years (and that estimate understates the problem). In addition, Social Security can only meet all of its obligations each year if the IOUs it holds in its trust fund can be paid off as part of the normal budget. A balanced budget would go a long way in ensuring that happens.
The truth is that someone has to pay for Washington’s over spending. The mere fact that we have debt means we have to pay for our current spending PLUS pay for the debt service on the overspending that Congress has done in the past. If it’s not seniors who pay for it, then who should it be? After all didn’t seniors, as a group, help elect the Congresses and Presidents who ran up the debt? So why isn’t it appropriate that seniors take some responsibility for ensuring the situation is resolved? Non-seniors, even those unborn today, will be required to pay off the rest at some point in time.
5/15/2011
Two Governmnet Updates
This past week the Federal government released two updates that are important to all Americans.
The first update was the April CPI number. The new number is 224.906. By itself it's pretty meaningless, but when taken in conjunction with the September, 2011 CPI number (218.439) it gains real importance. We've now seen the CPI value increase by 2.96% in just 7 months of 2011. Anualized it will be over 5% for the year. The WH OMB had projected it would only increase 1.3%. It had also projected the CPI would only increase by a maximum of 2.1% for any year between now and the end of 2021. Those projections look pretty foolish. So inflation is here, its higher than budgeted and it means the 2012 Budget's projected 10 year deficit of $7.2 trillion is meaningless.
The second update released this past week was the Social Security Trust Fund report for 2010. The report showed the trust funds for Medicare and Social Security being in more difficulty than previously reported. All of the trustees, government and public, expressed the opinion that the Social Security and Medicare program fundementals need to be addressed soon if they are to remain solvent.
This year we've heard Democrats like President Obama claim that significant reform isn't called for. We've heard Democrats like Sen. Reid and Sen. Durbin tell us to leave Social Security reform out of the budget debate. So are we to believe they really have the well being of the country and our Nation's finances at heart? Or are they just playing "politics as usual" hoping to maintain power, regardless of the cost.
I believe it gets easy to see which it is with each passing month.
The first update was the April CPI number. The new number is 224.906. By itself it's pretty meaningless, but when taken in conjunction with the September, 2011 CPI number (218.439) it gains real importance. We've now seen the CPI value increase by 2.96% in just 7 months of 2011. Anualized it will be over 5% for the year. The WH OMB had projected it would only increase 1.3%. It had also projected the CPI would only increase by a maximum of 2.1% for any year between now and the end of 2021. Those projections look pretty foolish. So inflation is here, its higher than budgeted and it means the 2012 Budget's projected 10 year deficit of $7.2 trillion is meaningless.
The second update released this past week was the Social Security Trust Fund report for 2010. The report showed the trust funds for Medicare and Social Security being in more difficulty than previously reported. All of the trustees, government and public, expressed the opinion that the Social Security and Medicare program fundementals need to be addressed soon if they are to remain solvent.
This year we've heard Democrats like President Obama claim that significant reform isn't called for. We've heard Democrats like Sen. Reid and Sen. Durbin tell us to leave Social Security reform out of the budget debate. So are we to believe they really have the well being of the country and our Nation's finances at heart? Or are they just playing "politics as usual" hoping to maintain power, regardless of the cost.
I believe it gets easy to see which it is with each passing month.
4/15/2011
The Most Important Budget Numbers of All
With all the discussion on the 2012 Budget, there hasn’t been much, if any, discussion on the most important numbers of all. As of the time this was written they’re 223.467 and 3.49. What are they and why are they important? The numbers that I hear people talking about are $7.2 trillion, $100 billion, $61 billion and $38 billion. Those are all pretty meaningless despite all the talk. Why? Because they assume the WH OMB budget projections are a reasonable starting point. That’s where 223.467 and 3.49 come into play.
223.467 is the Consumer Price Index (CPI) value for March 2011. Knowing that number and knowing the value for September, 2010 (218.439) allows us to calculate the level of inflation we’ve experienced during the first 6 months of the Federal Government’s 2011 fiscal year. That number is 2.3%! But that’s just for 6 months. So why is that an issue? The WH OMB projected inflation at 1.3% for the entire year (2011) and projected that inflation would average 2.0% over the next twelve years. They projected a maximum rate of 2.1%. Yet we’ve surpassed the average and maximum rates in just 6 months of this year?
3.49% is the 10 Year Treasury rate for 4/13/2011. It’s been over 3.0% since December 7th, 2010 when it reached 3.15%. Why is that important? The WH OMB projected the 10 Yr Treasury rate would average 3.0% for 2011 and only 3.6% for 2012. It appears that the WH OMB also understated the level of interest rates we would face. And interest rates determine how much Net Interest Expense we’ll incur on our National Debt. Remember, 1.0% times $20 trillion equals $200 billion. So understating interest rates seriously understates Net Interest Expense and the size of deficits.
The WH OMB came up with a budget which added $7.2 trillion in accumulated deficits over the next ten (10) years. But if the inflation rate and interest rates are seriously understated, doesn’t that mean the $7.2 trillion is also seriously understated? Yes it does.
But it doesn’t help answer the question on how world recognized economists like the WH’s Austan Goolsbee didn’t see that the projections were way under stated. I caught it, don’t you think they/he should have?
Or could it possibly have been done on purpose?
223.467 is the Consumer Price Index (CPI) value for March 2011. Knowing that number and knowing the value for September, 2010 (218.439) allows us to calculate the level of inflation we’ve experienced during the first 6 months of the Federal Government’s 2011 fiscal year. That number is 2.3%! But that’s just for 6 months. So why is that an issue? The WH OMB projected inflation at 1.3% for the entire year (2011) and projected that inflation would average 2.0% over the next twelve years. They projected a maximum rate of 2.1%. Yet we’ve surpassed the average and maximum rates in just 6 months of this year?
3.49% is the 10 Year Treasury rate for 4/13/2011. It’s been over 3.0% since December 7th, 2010 when it reached 3.15%. Why is that important? The WH OMB projected the 10 Yr Treasury rate would average 3.0% for 2011 and only 3.6% for 2012. It appears that the WH OMB also understated the level of interest rates we would face. And interest rates determine how much Net Interest Expense we’ll incur on our National Debt. Remember, 1.0% times $20 trillion equals $200 billion. So understating interest rates seriously understates Net Interest Expense and the size of deficits.
The WH OMB came up with a budget which added $7.2 trillion in accumulated deficits over the next ten (10) years. But if the inflation rate and interest rates are seriously understated, doesn’t that mean the $7.2 trillion is also seriously understated? Yes it does.
But it doesn’t help answer the question on how world recognized economists like the WH’s Austan Goolsbee didn’t see that the projections were way under stated. I caught it, don’t you think they/he should have?
Or could it possibly have been done on purpose?
4/14/2011
Taxing the Wealthy
With President Obama’s recent speech on closing the budget gap, the topic of taxing the wealthy comes to the forefront again. This has been a strategy for Democrats from the beginning of our Individual Federal Income Tax (FIT). For approximately half of our Nation’s history we had no FIT. From the beginning, taxes levied by the Federal Government on individuals had to be done on a per head basis or so much tax per person. In 1913 the Constitution was changed to allow for individuals to be taxed based on their earnings. It was sold as a minor tax on the very wealthy. There were two components to the tax. The first was a 1% tax that applied to all individuals and all income. The second was the super tax on higher incomes. The maximum rate was 6% on income over $500,000. That meant the tax on incomes above $500,000 was 7%. Those rates didn’t last long and by 1918 the top rate was 77%. It reached as high as 94% beginning in 1944.
The Democrats’ definition of wealthy has stayed the same over the years. Just as they often fail to inflation adjust many things, they have failed to inflation adjust the level of income that defines wealthy. We often hear that wealthy is defined as making over $200,000 (or $250,000). $200,000 was first used as the top income tax bracket in 1922. Then someone was wealthy since that’s the equivalent of $2,600,000 when adjusted for nearly 90 years of inflation.
Republicans typically counter the “tax the wealthy” strategy by telling us the wealthy are job creators, small business owners and those who invest in new ideas. While this is true, this leaves out two important points. The first is what the wealthy do with their wealth. Americans have been generous people and they give much of their money away to support community projects that they deem of value. Our healthcare system is “the best in the World” because at its core is the not-for-profit system that receives charitable donations. There is no better example of that than the Cleveland Clinic. It opened its new facilities beginning in 2008. Approximately 2/3s of the cost to construct and furnish those facilities was raised through donations. Our Universities are supported by endowments that come from donations. Our cultural institutions such as churches and art museums have benefited by gifts from wealthy donors. And a wide array of support groups count on donations for much of their budget revenues. So taxing the wealthy means less support for these types of organizations.
I usually think of the wealthy in more personal terms. I have three children and many nieces and nephews. In our family we’re now seeing a new generation of grand children and grand nieces and nephews. I want them to be successful in life, however they define success. And if that success brings them above average wealth, I’d like them to have the opportunity to use it for the things they value, not see it taken by government. I want the same for other people’s children and grand children and future generations too. If a young man from Chicago’s “south side” grows up to be a sports star, I want him to be able to use his money to help his community. What if a young women from Cleveland’s “east side” becomes a successful business person, shouldn’t she be able to do something positive for her old neighborhood? So if someone works hard, is creative, has an outstanding talent, comes up with a unique idea or just gets lucky playing the lottery, I’d like to see them retain more of their “earnings” so as to use it to help those they feel are most deserving of their support.
For approximately half of our Nation’s history we didn’t allow the Federal government to tax individuals based on their earnings. During that period we built the foundation of our industry, educational and healthcare systems that have become the “best” in the world. Was it coincidence that the two coincided? Or was a tax policy that allowed individuals to retain their earnings and direct their wealth to those activities and organizations they felt best reflected their values a key element of that success? If it was, why is taxing the wealthy such a good idea after all?
The Democrats’ definition of wealthy has stayed the same over the years. Just as they often fail to inflation adjust many things, they have failed to inflation adjust the level of income that defines wealthy. We often hear that wealthy is defined as making over $200,000 (or $250,000). $200,000 was first used as the top income tax bracket in 1922. Then someone was wealthy since that’s the equivalent of $2,600,000 when adjusted for nearly 90 years of inflation.
Republicans typically counter the “tax the wealthy” strategy by telling us the wealthy are job creators, small business owners and those who invest in new ideas. While this is true, this leaves out two important points. The first is what the wealthy do with their wealth. Americans have been generous people and they give much of their money away to support community projects that they deem of value. Our healthcare system is “the best in the World” because at its core is the not-for-profit system that receives charitable donations. There is no better example of that than the Cleveland Clinic. It opened its new facilities beginning in 2008. Approximately 2/3s of the cost to construct and furnish those facilities was raised through donations. Our Universities are supported by endowments that come from donations. Our cultural institutions such as churches and art museums have benefited by gifts from wealthy donors. And a wide array of support groups count on donations for much of their budget revenues. So taxing the wealthy means less support for these types of organizations.
I usually think of the wealthy in more personal terms. I have three children and many nieces and nephews. In our family we’re now seeing a new generation of grand children and grand nieces and nephews. I want them to be successful in life, however they define success. And if that success brings them above average wealth, I’d like them to have the opportunity to use it for the things they value, not see it taken by government. I want the same for other people’s children and grand children and future generations too. If a young man from Chicago’s “south side” grows up to be a sports star, I want him to be able to use his money to help his community. What if a young women from Cleveland’s “east side” becomes a successful business person, shouldn’t she be able to do something positive for her old neighborhood? So if someone works hard, is creative, has an outstanding talent, comes up with a unique idea or just gets lucky playing the lottery, I’d like to see them retain more of their “earnings” so as to use it to help those they feel are most deserving of their support.
For approximately half of our Nation’s history we didn’t allow the Federal government to tax individuals based on their earnings. During that period we built the foundation of our industry, educational and healthcare systems that have become the “best” in the world. Was it coincidence that the two coincided? Or was a tax policy that allowed individuals to retain their earnings and direct their wealth to those activities and organizations they felt best reflected their values a key element of that success? If it was, why is taxing the wealthy such a good idea after all?
4/12/2011
“It’s the Congress, Stupid”
Once and for all the question of who is responsible for our Nation’s finances is being answered. While the President of the United States can influence, ultimate the responsibility falls to Congress. That couldn’t be clearer than this year (2011) when we have a Republican controlled House and a Democrat controlled Senate fighting over the direction and size of spending. So if Congress is responsible for our budget, why do the “experts” track budget performance and National Debt by Presidents? Shouldn’t it be tracked by which party controlled Congress?
It does matter how you track budget performance. Let’s take the first Bush presidency. The National Debt stood at $2.6 trillion at the end of 1988 and rose to $4.0 trillion by 1992 for an increase of 54% during his Presidency. Publicly held debt rose 46% and debt borrowed from Government Accounts (i.e. Social Security) rose 82%. This is hardly a stellar track record for a Republican president as is pointed out by Democrats on a regular basis.
But let’s take a second look. This time let’s look at which party controlled Congress during those same years. President Bush served for four years (2 Congressional Sessions). During those two sessions the Democrats controlled the House by an average 263 to 172 (91) seats and the Senate by an average 55 to 45 (10) seats. This sheds a much different light on the subject doesn’t it? It may also explain why Democrats and the media prefer to track budget performance and debt increase by president. Not only is it easier to follow one individual, but it takes the “heat” off of the Democrats.
Curious to see the control of Congress since the Republican and Democrat parties dominated the politics of the our country, I created a worksheet showing that for each session of Congress. What appeared was three distinct periods. The period from 1861 to 1931 was one dominated by Republican Presidents (all but 2) and Republican control of both the House and Senate. During this period we saw surpluses during times of peace and prosperity and deficits during times of war and economic turmoil.
The second period, from 1932-1994, saw a nearly equal number of Republican (5) and Democrat (6) presidents. However Congress was dominated by the Democrats. The Democrats controlled the House by an average of 75 seats (259-174). Republicans only held the majority for 3 of the 32 sessions (1931-1932, 1947-1948 & 1953-1954). Democrats controlled the Senate by an average of 17 seats (57-43). Republicans only held the majority for 6 of the 32 sessions including 3 shown above and the first three sessions while President Reagan held office. Even during President Reagan’s term the House was dominated by Democrats as they held an average majority of 77 seats (256-179). It was during this period that we saw a change in fiscal management away from surpluses to deficit spending.
As voters have struggled with which party to trust regarding our budget, some facts might help give light to the subject. The first is the last time the two parties were responsible for a budget surplus. The last time a budget passed by a Democrat controlled Congress finished with a surplus was 1969. They’ve been responsible for 30 budgets since then, all have ended with deficits. The Republican’s last surplus came in 2001. They are 4 surpluses for their last 12 budgets. 911 (2001) and the 2008 financial collapse had a serious impact on budget performance from 2002 – the current. In 2011 it is Republicans who are fighting for fiscal constraint, not Democrats.
The second place we might look is to the 104th Congress. That Congress held a vote on the Balanced Budget Amendment. While a close vote, it failed to pass. Many of the current Senate Democrat Party leadership team were in office then. Then Senators Reid, Kerry, Levin, Murray, Boxer, Feinstein, Leahy and Rockefeller along with then Representatives Durbin and Sanders all voted AGAINST the balanced budget amendment. At the time our National Debt was $5 trillion. Those same members of Congress are opposing any reduction in spending from President Obama’s budget which shows our debt growing to over $26 trillion by 2021. (And that’s dramatically understated, as I’ve pointed out in previous blogs.)
It appears the country has a clear choice. If you believe unlimited debt is a proper way to manage our finances, Democrats offer the best choice. Otherwise you may want to look for an alternative!
It does matter how you track budget performance. Let’s take the first Bush presidency. The National Debt stood at $2.6 trillion at the end of 1988 and rose to $4.0 trillion by 1992 for an increase of 54% during his Presidency. Publicly held debt rose 46% and debt borrowed from Government Accounts (i.e. Social Security) rose 82%. This is hardly a stellar track record for a Republican president as is pointed out by Democrats on a regular basis.
But let’s take a second look. This time let’s look at which party controlled Congress during those same years. President Bush served for four years (2 Congressional Sessions). During those two sessions the Democrats controlled the House by an average 263 to 172 (91) seats and the Senate by an average 55 to 45 (10) seats. This sheds a much different light on the subject doesn’t it? It may also explain why Democrats and the media prefer to track budget performance and debt increase by president. Not only is it easier to follow one individual, but it takes the “heat” off of the Democrats.
Curious to see the control of Congress since the Republican and Democrat parties dominated the politics of the our country, I created a worksheet showing that for each session of Congress. What appeared was three distinct periods. The period from 1861 to 1931 was one dominated by Republican Presidents (all but 2) and Republican control of both the House and Senate. During this period we saw surpluses during times of peace and prosperity and deficits during times of war and economic turmoil.
The second period, from 1932-1994, saw a nearly equal number of Republican (5) and Democrat (6) presidents. However Congress was dominated by the Democrats. The Democrats controlled the House by an average of 75 seats (259-174). Republicans only held the majority for 3 of the 32 sessions (1931-1932, 1947-1948 & 1953-1954). Democrats controlled the Senate by an average of 17 seats (57-43). Republicans only held the majority for 6 of the 32 sessions including 3 shown above and the first three sessions while President Reagan held office. Even during President Reagan’s term the House was dominated by Democrats as they held an average majority of 77 seats (256-179). It was during this period that we saw a change in fiscal management away from surpluses to deficit spending.
As voters have struggled with which party to trust regarding our budget, some facts might help give light to the subject. The first is the last time the two parties were responsible for a budget surplus. The last time a budget passed by a Democrat controlled Congress finished with a surplus was 1969. They’ve been responsible for 30 budgets since then, all have ended with deficits. The Republican’s last surplus came in 2001. They are 4 surpluses for their last 12 budgets. 911 (2001) and the 2008 financial collapse had a serious impact on budget performance from 2002 – the current. In 2011 it is Republicans who are fighting for fiscal constraint, not Democrats.
The second place we might look is to the 104th Congress. That Congress held a vote on the Balanced Budget Amendment. While a close vote, it failed to pass. Many of the current Senate Democrat Party leadership team were in office then. Then Senators Reid, Kerry, Levin, Murray, Boxer, Feinstein, Leahy and Rockefeller along with then Representatives Durbin and Sanders all voted AGAINST the balanced budget amendment. At the time our National Debt was $5 trillion. Those same members of Congress are opposing any reduction in spending from President Obama’s budget which shows our debt growing to over $26 trillion by 2021. (And that’s dramatically understated, as I’ve pointed out in previous blogs.)
It appears the country has a clear choice. If you believe unlimited debt is a proper way to manage our finances, Democrats offer the best choice. Otherwise you may want to look for an alternative!
4/11/2011
A Letter to Fox News
The following is a letter I'm sending to Fox News. I'm not sure whether their main concern is being "balanced" and whether they are really interested in reporting all the news. I've written to various members of their team earlier this year about the 2012 budget problems.
If you have a concern about what they're reporting (or in this case not reporting) you might want to write to them too!
-------------------------------
April 10, 2011
Sarah Courtney
White House Producer
Chad Pergram
Sr. Producer – U.S. Congress
Carl Cameron
Chief Political Correspondent
400 N Capitol ST NW
Washington, DC 20001
Re: 2011 and 2011 Budget Coverage
Dear Fox D.C. Political Staff,
All the stories you write about the 2011 and 2012 budget debates are nice, but what they actually are is cover for the White House and Democrats as they pull off the big story. The Financial destruction of our Nation. I understand why Politico, the NY Times and the Washington Post do it, but I had hoped Fox News might be different. I think I’ve found out that’s not the case.
The big story isn’t the budget deal and who won (the radicals in the WH won), the big story is how dishonest the WH OMB 2012 Budget is and how no one seems to be concerned about it. But I’ll keep telling people about it until they listen AND DO SOMETHING about it, or until I can no longer write.
The WH OMB began using unreasonably low budget assumptions for inflation beginning with the 2010 budget. They’ve continued that through the 2012 budget. Inflation:
2010 Actual = 1.6%
2011 Projected = 1.3% (Why lower when we are in a recovery?)
(We reached this in February with 7 months to go!)
2012 – 2021 Ave. Projected = 2.0% (Haven’t had a decade that low in 50 years)
2012 – 2021 Max. Projected = 2.1% (Only 7 yrs in past 45 and those were recessions)
Inflation was at 1.314% after 5 months meaning we will surpass their ave. and max. for 2012 – 2021 in 2011! But not only is the inflation assumption understated, so are the interest rate assumptions. They assumed an average 3.0% 10 Treasury rate for 2011. That was a decrease from the 3.9% they had projected in the 2011 budget. We surpassed 3.0% in December and have been above it each month since.
So why would the WH OMB and Goolsbee (a world recognized economist) use such understated assumptions in the budget? Compounding and Interest Rates!
The compounding factors for the last five years in the budget projections would be much higher if they had used 3.5% as compared to using 2.0% as the average inflation assumption. This means the deficits for those years are understated. And since interest rates are tied to inflation, using lower inflation assumptions allows them to use lower interest rate assumptions. 1% times $20 trillion = $200 billion. Six of the 10 years the projected National Debt exceeds $20 trillion. The average for the 10 years is $21.4 trillion. And those numbers are understated! Imagine what Net Interest Expense should be!
So as Moody’s talks about a downgrade (which will increase interest rates), as the head of WalMart talks about serious inflation, as the IMF talks about abandoning the dollar and as China raises their long term treasury rate to over 6% (and ours is at 3.5%) we hear all kinds of reports on the 2011 budget deal, but not one report on how dishonest the WH OMB was in coming up with their budget assumptions.
I’m also still hoping that someone at Fox will cover the fact that Democrats have been lying about Social Security and the budget. It might be an important story too. I first heard Sen. Durbin make the claim on Meet the Press. Then Sen. Reid, Franken and Sanders held the big rally. Then Rep. Berrerra made the claim on Cavuto. They claim that Social Security isn’t in the budget and doesn’t add 1 penny to the deficit. That’s not exactly what Table S-4 on page 176 shows, is it! Why the media and the Republicans haven’t pointed that out is beyond me!
And why do we give Democrats any credibility on the budget? As this year shows, Congress passes our budgets. And the last time a budget passed by a Democrat controlled Congress finished with a surplus was 1969. But let’s not tell anyone. It wouldn’t be fair would it?
Keep up the “good” work. At this rate we have less than two years before the entire collapse of the Federal Government’s finances. Now that will be a story worth covering. And we’ll know why it happened.
With great concern.
Alan R. Davis
Private Citizen
If you have a concern about what they're reporting (or in this case not reporting) you might want to write to them too!
-------------------------------
April 10, 2011
Sarah Courtney
White House Producer
Chad Pergram
Sr. Producer – U.S. Congress
Carl Cameron
Chief Political Correspondent
400 N Capitol ST NW
Washington, DC 20001
Re: 2011 and 2011 Budget Coverage
Dear Fox D.C. Political Staff,
All the stories you write about the 2011 and 2012 budget debates are nice, but what they actually are is cover for the White House and Democrats as they pull off the big story. The Financial destruction of our Nation. I understand why Politico, the NY Times and the Washington Post do it, but I had hoped Fox News might be different. I think I’ve found out that’s not the case.
The big story isn’t the budget deal and who won (the radicals in the WH won), the big story is how dishonest the WH OMB 2012 Budget is and how no one seems to be concerned about it. But I’ll keep telling people about it until they listen AND DO SOMETHING about it, or until I can no longer write.
The WH OMB began using unreasonably low budget assumptions for inflation beginning with the 2010 budget. They’ve continued that through the 2012 budget. Inflation:
2010 Actual = 1.6%
2011 Projected = 1.3% (Why lower when we are in a recovery?)
(We reached this in February with 7 months to go!)
2012 – 2021 Ave. Projected = 2.0% (Haven’t had a decade that low in 50 years)
2012 – 2021 Max. Projected = 2.1% (Only 7 yrs in past 45 and those were recessions)
Inflation was at 1.314% after 5 months meaning we will surpass their ave. and max. for 2012 – 2021 in 2011! But not only is the inflation assumption understated, so are the interest rate assumptions. They assumed an average 3.0% 10 Treasury rate for 2011. That was a decrease from the 3.9% they had projected in the 2011 budget. We surpassed 3.0% in December and have been above it each month since.
So why would the WH OMB and Goolsbee (a world recognized economist) use such understated assumptions in the budget? Compounding and Interest Rates!
The compounding factors for the last five years in the budget projections would be much higher if they had used 3.5% as compared to using 2.0% as the average inflation assumption. This means the deficits for those years are understated. And since interest rates are tied to inflation, using lower inflation assumptions allows them to use lower interest rate assumptions. 1% times $20 trillion = $200 billion. Six of the 10 years the projected National Debt exceeds $20 trillion. The average for the 10 years is $21.4 trillion. And those numbers are understated! Imagine what Net Interest Expense should be!
So as Moody’s talks about a downgrade (which will increase interest rates), as the head of WalMart talks about serious inflation, as the IMF talks about abandoning the dollar and as China raises their long term treasury rate to over 6% (and ours is at 3.5%) we hear all kinds of reports on the 2011 budget deal, but not one report on how dishonest the WH OMB was in coming up with their budget assumptions.
I’m also still hoping that someone at Fox will cover the fact that Democrats have been lying about Social Security and the budget. It might be an important story too. I first heard Sen. Durbin make the claim on Meet the Press. Then Sen. Reid, Franken and Sanders held the big rally. Then Rep. Berrerra made the claim on Cavuto. They claim that Social Security isn’t in the budget and doesn’t add 1 penny to the deficit. That’s not exactly what Table S-4 on page 176 shows, is it! Why the media and the Republicans haven’t pointed that out is beyond me!
And why do we give Democrats any credibility on the budget? As this year shows, Congress passes our budgets. And the last time a budget passed by a Democrat controlled Congress finished with a surplus was 1969. But let’s not tell anyone. It wouldn’t be fair would it?
Keep up the “good” work. At this rate we have less than two years before the entire collapse of the Federal Government’s finances. Now that will be a story worth covering. And we’ll know why it happened.
With great concern.
Alan R. Davis
Private Citizen
4/07/2011
Democrats: Lying, Playing Games and with a Dismal Record
It’s sad to see the budget debate go on as it has, not because the debate is bad, but because it should have been won some time ago. The real debate is over whom the American Public should trust. That was easily addressed shortly after the White House OMB released the 2012 budget. There were three keys:
- Social Security
- Budget Assumptions
- Budget Performance
If the Republicans had properly addressed those three items the debate would have been over a long time ago.
Social Security: The beginning of the year the Progressives put together an aggressive campaign to “Save Social Security”. The first I knew about it was Feb. 20th when I watched Sen. Durbin on Meet the Press claim that Social Security wasn’t part of the budget, didn’t add a penny to the deficit and was sound for decades. I’ve seen others repeat it and Sen. Reid and others held a Save Social Security rally on Monday, March 28th.
I had already downloaded the Summary tables from the WH OMB website so I knew it wasn’t true. You can find Social Security in the WH OMB budget on page 176 Table S-4 and they project it will add $1 trillion to the deficit over the next 10 years.
Budget Assumptions: Any budget’s projections are dependent on the assumptions they are based on. That’s why I used to get my Board’s approval of assumptions the month before I presented the overall budget for approval. That’s why I go to the assumptions first, before looking at the projections. They appear on page 202 Table S-13. This year I immediately saw a problem. I saw the WH OMB using some pretty amazing assumptions for inflation (Consumer Price Index, percent change, year to year). They projected a drop in inflation this year (from 1.6% to 1.3%) despite showing us in a recovery? They showed an average inflation of 2.0% and a maximum inflation of 2.1% for the next 10 years. Those numbers can’t be supported by historical trending which shows inflation typically falling into a range of 3.5% to 4.0%.
Why would they understate inflation? Compounding and interest rates! Lower inflation rates compound to much lower inflation factors for the last five years of the budget understating the size of deficits. And lower inflation rate assumptions means lower interest rate assumptions can be used. A 1% understatement of interest rates means a $200 billion understatement of Net Interest Expense projection for a single year with average debt of $20 trillion. The budget includes several years with higher debt than that.
Budget Performance: Having studied the history of the US Budget (surpluses and deficits) by party in control of Congress, I know that the last budget passed by Democrats to finish with a surplus was the 1969 budget. They are 0 for 29 since then. And their voting record on things like Balanced Budget Amendments, etc. is dismal.
So we’re left with a case of Democrats:
- Lying (about Social Security impact on the budget)
- Playing games (with the assumptions to make the budget look better)
- Voting against fiscal discipline
That’s how easy it is to prove to the American People that Democrats can’t be trusted. Why Republicans, Conservatives and the media haven’t already pointed this out is beyond me. But now maybe they will!
- Social Security
- Budget Assumptions
- Budget Performance
If the Republicans had properly addressed those three items the debate would have been over a long time ago.
Social Security: The beginning of the year the Progressives put together an aggressive campaign to “Save Social Security”. The first I knew about it was Feb. 20th when I watched Sen. Durbin on Meet the Press claim that Social Security wasn’t part of the budget, didn’t add a penny to the deficit and was sound for decades. I’ve seen others repeat it and Sen. Reid and others held a Save Social Security rally on Monday, March 28th.
I had already downloaded the Summary tables from the WH OMB website so I knew it wasn’t true. You can find Social Security in the WH OMB budget on page 176 Table S-4 and they project it will add $1 trillion to the deficit over the next 10 years.
Budget Assumptions: Any budget’s projections are dependent on the assumptions they are based on. That’s why I used to get my Board’s approval of assumptions the month before I presented the overall budget for approval. That’s why I go to the assumptions first, before looking at the projections. They appear on page 202 Table S-13. This year I immediately saw a problem. I saw the WH OMB using some pretty amazing assumptions for inflation (Consumer Price Index, percent change, year to year). They projected a drop in inflation this year (from 1.6% to 1.3%) despite showing us in a recovery? They showed an average inflation of 2.0% and a maximum inflation of 2.1% for the next 10 years. Those numbers can’t be supported by historical trending which shows inflation typically falling into a range of 3.5% to 4.0%.
Why would they understate inflation? Compounding and interest rates! Lower inflation rates compound to much lower inflation factors for the last five years of the budget understating the size of deficits. And lower inflation rate assumptions means lower interest rate assumptions can be used. A 1% understatement of interest rates means a $200 billion understatement of Net Interest Expense projection for a single year with average debt of $20 trillion. The budget includes several years with higher debt than that.
Budget Performance: Having studied the history of the US Budget (surpluses and deficits) by party in control of Congress, I know that the last budget passed by Democrats to finish with a surplus was the 1969 budget. They are 0 for 29 since then. And their voting record on things like Balanced Budget Amendments, etc. is dismal.
So we’re left with a case of Democrats:
- Lying (about Social Security impact on the budget)
- Playing games (with the assumptions to make the budget look better)
- Voting against fiscal discipline
That’s how easy it is to prove to the American People that Democrats can’t be trusted. Why Republicans, Conservatives and the media haven’t already pointed this out is beyond me. But now maybe they will!
3/31/2011
Into the Belly of the Beast; Part II
Last fall I came to DC to tell a story. The story I told was one where it had been 29 years (1969) since a Democrat controlled Congress had passed a budget which ended with a surplus. Was that an important message? You can’t tell because no conservative, in Congress or out, or the RNC used that message.
This spring I decided to come to DC again. This time I had a different story to tell. With the Federal Budget the main topic of discussion, I thought it was important for the public to know that the White House Office of Management and Budget thought using a 2.0% average inflation rate (maximum 2.1%) for the next 10 years was appropriate. I knew we hadn’t had a decade that low in the past fifty years and that we were more likely to see high inflation, not low. Was that an important message? You can’t tell because no conservative, in Congress or out, or the RNC is using that message.
Maybe I didn’t go to the right people? I stopped by 99 of the 100 Senate offices and left them all a package. I went by approximately 150 Representatives’ offices and left them packages.
Maybe I should have taken it to media? You mean like Politico, Weekly Standard, National Journal, The Hill, Fox News, the Washington Post and many more. Oh, the one’s that I’ve sent numerous letters, emails and calls to. Yes those. Was it an important message? You can’t tell because no one in the media is covering that issue.
Why is it important? Compounding and Interest Rates. Compounding is the concept that says low rates over 10 years will return relatively small values in the last five years, but higher rates over 10 years will return much higher values in the last five years. The difference is huge, as in much larger deficits, compared to if they used reasonable inflation assumptions. And it would require using higher interest rates too! What I did to check this out isn’t hard. I went to the White House Office of Management and Budget website to find Table S-13 on page 202 of the Summary Schedules and I Googled CPI and found the government website for CPI (inflation). You’ll see that I’m correct.
As I drove to DC I heard reports about a rally held by Sen. Reid and some other Democrats. They told reporters there was no need to address Social Security at this time since it doesn’t affect the Federal budget. I thought that was strange since I’ve looked at Table S-4 on page 176 of the 2012 budget. It shows Social Security Outlays (expenditures) of $9.9 trillion and Receipts of $8.9 trillion. That shows a deficit of $1 trillion in the White House 2012 – 2021 budget. Is that an important message? You can’t tell because no conservative, in Congress or out, or the RNC is talking about this! Neither is the media!
So tomorrow I head back to Ohio a little more tired, a bit sorer and wondering “What is going on?” These aren’t difficult messages and they are central to the question on “Who can the American Public trust when it comes to the budget?” Is it an important message? You can’t tell because no conservative, in Congress or out, or the RNC is talking about this! Neither is the media!
This spring I decided to come to DC again. This time I had a different story to tell. With the Federal Budget the main topic of discussion, I thought it was important for the public to know that the White House Office of Management and Budget thought using a 2.0% average inflation rate (maximum 2.1%) for the next 10 years was appropriate. I knew we hadn’t had a decade that low in the past fifty years and that we were more likely to see high inflation, not low. Was that an important message? You can’t tell because no conservative, in Congress or out, or the RNC is using that message.
Maybe I didn’t go to the right people? I stopped by 99 of the 100 Senate offices and left them all a package. I went by approximately 150 Representatives’ offices and left them packages.
Maybe I should have taken it to media? You mean like Politico, Weekly Standard, National Journal, The Hill, Fox News, the Washington Post and many more. Oh, the one’s that I’ve sent numerous letters, emails and calls to. Yes those. Was it an important message? You can’t tell because no one in the media is covering that issue.
Why is it important? Compounding and Interest Rates. Compounding is the concept that says low rates over 10 years will return relatively small values in the last five years, but higher rates over 10 years will return much higher values in the last five years. The difference is huge, as in much larger deficits, compared to if they used reasonable inflation assumptions. And it would require using higher interest rates too! What I did to check this out isn’t hard. I went to the White House Office of Management and Budget website to find Table S-13 on page 202 of the Summary Schedules and I Googled CPI and found the government website for CPI (inflation). You’ll see that I’m correct.
As I drove to DC I heard reports about a rally held by Sen. Reid and some other Democrats. They told reporters there was no need to address Social Security at this time since it doesn’t affect the Federal budget. I thought that was strange since I’ve looked at Table S-4 on page 176 of the 2012 budget. It shows Social Security Outlays (expenditures) of $9.9 trillion and Receipts of $8.9 trillion. That shows a deficit of $1 trillion in the White House 2012 – 2021 budget. Is that an important message? You can’t tell because no conservative, in Congress or out, or the RNC is talking about this! Neither is the media!
So tomorrow I head back to Ohio a little more tired, a bit sorer and wondering “What is going on?” These aren’t difficult messages and they are central to the question on “Who can the American Public trust when it comes to the budget?” Is it an important message? You can’t tell because no conservative, in Congress or out, or the RNC is talking about this! Neither is the media!
3/18/2011
The Emporer's New Clothes
http://www.cnbc.com/id/42130406
http://www.bls.gov/cpi/#tables
The February Consumer Price number was just posted. It stands at:
Feb 2011 = 221.309
Sep 2010 = 218.439
That's an increase of 1.31% in just five (5) months. Why is that important? The WH OMB has projected that it will only increase 1.3% for the entire year. If inflation continues to increase at this rate it will go up approximately 3.2% by September 30th, 2011.
But how can that be? The WH OMB has projected that inflation will only average 2.0% over the next decade and won't surpass 2.1%. Those projections are looking more ridiculous all the time. (But if anyone had actually checked for historical trends, they've looked pretty ridiculous from the first time they used them in the 2010 budget.)
Why is this important? Compounding! Compounding is the cummulative impact of rates over time. The lower the rates, the lower the adjustment factor for the later years. The higher the rates, the higher the adjustment factor for the later years. The factor for year ten of the 2012 budget is just 1.23. The factor for the last year during the period of runaway infaltion in the 70's - early 80's was 2.38. So understating inflation can have a very significant impact on the reasonableness of budget projections. And in this case they look like they're dramatically understated.
Why no one in the media, the public interest groups or Congress hasn't brought this up is beyond me. Maybe its "Emporer's New Clothes Syndrome"?
It looks like I may just have to go to DC and bring it up myself!
http://www.bls.gov/cpi/#tables
The February Consumer Price number was just posted. It stands at:
Feb 2011 = 221.309
Sep 2010 = 218.439
That's an increase of 1.31% in just five (5) months. Why is that important? The WH OMB has projected that it will only increase 1.3% for the entire year. If inflation continues to increase at this rate it will go up approximately 3.2% by September 30th, 2011.
But how can that be? The WH OMB has projected that inflation will only average 2.0% over the next decade and won't surpass 2.1%. Those projections are looking more ridiculous all the time. (But if anyone had actually checked for historical trends, they've looked pretty ridiculous from the first time they used them in the 2010 budget.)
Why is this important? Compounding! Compounding is the cummulative impact of rates over time. The lower the rates, the lower the adjustment factor for the later years. The higher the rates, the higher the adjustment factor for the later years. The factor for year ten of the 2012 budget is just 1.23. The factor for the last year during the period of runaway infaltion in the 70's - early 80's was 2.38. So understating inflation can have a very significant impact on the reasonableness of budget projections. And in this case they look like they're dramatically understated.
Why no one in the media, the public interest groups or Congress hasn't brought this up is beyond me. Maybe its "Emporer's New Clothes Syndrome"?
It looks like I may just have to go to DC and bring it up myself!
3/17/2011
The New Washington “Speak”
Washington has come up with some “new” terms to use when they talk about our Nation’s Finances. They talk about “Primary Deficit” and “Publicly Held Debt”. What are they and why are they using them?
Primary Deficit is a term they’ve invented for the difference between Receipts and Outlays WITHOUT including Net Interest Expense. Seems a little crazy to me? Isn’t that like me talking about my budget without including payments on my credit cards? Or Mortgage? Why would they be talking about “Primary Deficit” at this time?
It’s pretty easy to see through what they’re doing. Interest rates are extremely low right now. It is allowing us to have Net Interest Expense that’s lower than what we averaged during the 1990’s, but with three times the debt.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
The Fed Fund rate is near zero which keeps short term treasury rates very low. That allows them to finance a considerable amount of our debt with short term treasuries. The problem with that is interest rates won’t remain this low forever. At some time the Fed Fund will return to “normal” levels and the Net Interest we pay on our National Debt will explode. So they invent a new term that excludes Net Interest Expense so as to ignore that reality.
Publicly Held Debt is a term that defines one portion of our National Debt. It’s actually not a new term, just being talked about more at this time. There are two components to our debt. The first is the portion owned by individuals, organizations and foreign countries known as Public Debt. The other portion is the debt owed to other parts of the government known as Intra-Governmental Debt. Coming out of WWII publicly held debt accounted for 90% of our total debt. But as Congress used the surplus in trust funds (i.e. Social Security Trust Fund) for other purposes, publicly held debt dropped to as low as 55% of total debt.
So talking about Publicly Held Debt instead of Total National Debt allows them to ignore a growing and sizable problem. But now that Social Security is “in the red” and needs to be paid back for the I.O.U.’s it has accumulated, the issue is being brought to the forefront.
So when we hear Washington speak in new terms like “Primary Deficit” or “Publicly Held” Debt we can assume they are trying to ignore the reality of some important problem, just like they're trying to ignore that fact we are out of money! Broke!
Primary Deficit is a term they’ve invented for the difference between Receipts and Outlays WITHOUT including Net Interest Expense. Seems a little crazy to me? Isn’t that like me talking about my budget without including payments on my credit cards? Or Mortgage? Why would they be talking about “Primary Deficit” at this time?
It’s pretty easy to see through what they’re doing. Interest rates are extremely low right now. It is allowing us to have Net Interest Expense that’s lower than what we averaged during the 1990’s, but with three times the debt.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
The Fed Fund rate is near zero which keeps short term treasury rates very low. That allows them to finance a considerable amount of our debt with short term treasuries. The problem with that is interest rates won’t remain this low forever. At some time the Fed Fund will return to “normal” levels and the Net Interest we pay on our National Debt will explode. So they invent a new term that excludes Net Interest Expense so as to ignore that reality.
Publicly Held Debt is a term that defines one portion of our National Debt. It’s actually not a new term, just being talked about more at this time. There are two components to our debt. The first is the portion owned by individuals, organizations and foreign countries known as Public Debt. The other portion is the debt owed to other parts of the government known as Intra-Governmental Debt. Coming out of WWII publicly held debt accounted for 90% of our total debt. But as Congress used the surplus in trust funds (i.e. Social Security Trust Fund) for other purposes, publicly held debt dropped to as low as 55% of total debt.
So talking about Publicly Held Debt instead of Total National Debt allows them to ignore a growing and sizable problem. But now that Social Security is “in the red” and needs to be paid back for the I.O.U.’s it has accumulated, the issue is being brought to the forefront.
So when we hear Washington speak in new terms like “Primary Deficit” or “Publicly Held” Debt we can assume they are trying to ignore the reality of some important problem, just like they're trying to ignore that fact we are out of money! Broke!
A Letter to Our WH Chief Economist
When the 2010 Budget was released I questioned whether they were using assumptions that were too optimistic. When the 2011 Budget was relaesed I did historic studies on each of the five key assumptions (Growth, Unemployment, Inflation and Short Term and Long Term Interest Rates) and found they couldn't be supported by historical trends. This year, when the 2012 Budget was released, I concentrated on the Inflation assumption. I found it to be dramatically understated making the budget projections meaningless. I wrote the following letter to the White House Chief Economist. I haven't heard back.
Maybe you should write to him too? Include a copy of my letter. And be sure to "CC" it to someone on the list.
Its time to let DC know we are watching as they play games with our future!
-------------------------------------------------------------------------------
March 16, 2011
Mr. Austan Goolsbee
Chief Economist
White House Council of Economic Advisors
1600 Pennsylvania Ave.
Washington, DC 20500
Re: 2012 Budget Assumptions
Dear Austan Goolsbee,
First I would like to acknowledge that my training and involvement in the study of economics is not at the same level as yours. I understand that you are well respected for your knowledge of economics, holding the Robert P. Gwinn Professor of Economics position at the University of Chicago. It’s with that understanding that I’m asking for your assistance in understanding the latest budget proposals put forward by the White House Office of Budget and Management.
Each year since 2009 I’ve downloaded the Summary Schedules and done a high level review of the assumptions and trends. In 2009 (2010 Budget) I came away with the feeling that the major assumptions in table S-13 were overly optimistic leading me to wonder if the results shown in the budget were achievable. In 2010 (2011 Budget) I analyzed historical data in an attempt to determine if the assumptions in table S-13 could be supported by past trends. I came away concerned that the inflation assumption was understated from what should be expected and that the Net Interest Expense was also significantly understated. I calculated Net Interest Expense could have been understated by as much as $3.8 trillion over the ten years covered in the budget. This year (2012 Budget) I concentrated on the inflation assumption as it is probably the most important driver determining the budget results. I looked at historical data and current year results. (I wrote to the President about my concerns. In case he hasn’t shared my letter with you, I’ve included a copy.)
During my years in preparing and presenting budgets, the first step I took was to get approval of “high level” assumptions so that’s why I started there. In the case of projecting results for 10 years, it would appear the inflation assumption (Consumer Price Index, percent change, year to year) would be the most important of those shown in Table S-13. Not only does it have a large impact on the size of Outlays, Deficits and Debt in the “out years”, but it also helps determine what assumptions are reasonable to use for interest rates.
This year I noticed that each of the three budgets used a maximum inflation assumption of 2.1%. So I wondered how well we had done in the past at keeping inflation at or below that rate. Going to the government website for CPI (inflation) I found since 1965 there had only been 7 years (1986, 1997, 1998, 2001, 2003, 2008 & 2010) at or below 2.1%.) Most of those years were during times of recession. Most non-recession years were significantly higher.
From there I looked at the combined assumptions to see what the trends are. I saw reasonably strong growth, decreasing unemployment and low interest rates. My understanding of economics says that during times of growth and reducing unemployment we typically see an increase in inflationary pressures. I believe that was one of the driving factors that caused the Fed to increase interest rates in 2004 (Fed Fund went from 1.00% to 5.25%).
I also looked to see how we have done so far in fiscal year 2011. What I came away with is we have nearly matched the 1.3% assumption for this year during the first 5 months (Oct ’10 to Feb ’11). If that’s the case, I’m not sure the assumption for 2011 will prove to be a reasonable one.
Finally I modeled the compounded impact of various inflation rate assumptions to see what impact it would have on year 10 projections. As you might expect, the difference between the factor for year 10 using the budget assumptions (average 2.0%) and what I thought would be a more historically appropriate rate (i.e. 3.5%) is very significant. The impact on interest rates would be quite significant too.
I’m hoping I’m missing something, but I’m not sure what it would be. I even checked to see if there was a precedent for the use of the Fed Target Rate as the maximum inflation rate. That wasn’t the case as the maximum inflation assumption in the 2009 budget and 2007 budget were 3.2% and 3.4% respectively. (I didn’t check 2008.)
I hope you can help me answer the following questions:
- Is it appropriate to use the Fed Target rate as the maximum inflation rate assumption in the budget?
- If not, what would you think would be a good set of inflation assumptions to use? (I thought a 3.5% to 4.0% average would be more reasonable.)
- If the inflation rate assumption is understated, doesn’t that mean the interest rate assumptions (especially 91 Day Treasury rate) are also understated?
- What would you think would be good assumptions for interest rates if you believe they are understated?
Again, my lack of advanced economic training may be causing me to miss something, but this looks like such a basic error that it almost appears to have been done on purpose. The combination of these issues results in such a significant understatement of Outlays, Deficits and Debt in out years it allows for the appearance of fiscal restraint when in fact reasonable projections would show a true crisis.
I’ve come to the conclusion that it would make sense to reforecast the budget so we have better numbers to look at and Congress has better numbers to make decisions from. What do you think?
I welcome your feedback.
Sincerely,
Alan R. Davis
Private Citizen
CC: Jacob J. Lew, Director
The Office of Management and Budget
725 17th Street, NW
Washington, DC 20503
Douglas Elmendorf, Director
Congressional Budget Office
Ford House Office Building, 4th Floor
Second and D Streets, SW
Washington, DC 20515-6925
Sen. Kent Conrad
Chairman, Senate Budget Com.
530 Hart SOB
Washington, DC 20510
Rep. Paul Ryan
Chairman, House Budget Com.
1233 Longworth HOB
Washington, DC 20515-4901
Rep. Bob Gibbs
329 Cannon HOB
Washington, DC 20515-3518
Sen. Sherrod Brown
713 Hart SOB
Washington, DC 20510
Sen. Rob Portman
B40D Dirksen SOB
Washington, DC 20510
Rep. Robert Dold
212 Cannon HOB
Washington, DC 20515-1310
Jim Angle
Fox News
400 N Capitol St NW
Washington, DC 20001
Ben S. Bernanke
Chairman, Federal Reserve Board
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
Maybe you should write to him too? Include a copy of my letter. And be sure to "CC" it to someone on the list.
Its time to let DC know we are watching as they play games with our future!
-------------------------------------------------------------------------------
March 16, 2011
Mr. Austan Goolsbee
Chief Economist
White House Council of Economic Advisors
1600 Pennsylvania Ave.
Washington, DC 20500
Re: 2012 Budget Assumptions
Dear Austan Goolsbee,
First I would like to acknowledge that my training and involvement in the study of economics is not at the same level as yours. I understand that you are well respected for your knowledge of economics, holding the Robert P. Gwinn Professor of Economics position at the University of Chicago. It’s with that understanding that I’m asking for your assistance in understanding the latest budget proposals put forward by the White House Office of Budget and Management.
Each year since 2009 I’ve downloaded the Summary Schedules and done a high level review of the assumptions and trends. In 2009 (2010 Budget) I came away with the feeling that the major assumptions in table S-13 were overly optimistic leading me to wonder if the results shown in the budget were achievable. In 2010 (2011 Budget) I analyzed historical data in an attempt to determine if the assumptions in table S-13 could be supported by past trends. I came away concerned that the inflation assumption was understated from what should be expected and that the Net Interest Expense was also significantly understated. I calculated Net Interest Expense could have been understated by as much as $3.8 trillion over the ten years covered in the budget. This year (2012 Budget) I concentrated on the inflation assumption as it is probably the most important driver determining the budget results. I looked at historical data and current year results. (I wrote to the President about my concerns. In case he hasn’t shared my letter with you, I’ve included a copy.)
During my years in preparing and presenting budgets, the first step I took was to get approval of “high level” assumptions so that’s why I started there. In the case of projecting results for 10 years, it would appear the inflation assumption (Consumer Price Index, percent change, year to year) would be the most important of those shown in Table S-13. Not only does it have a large impact on the size of Outlays, Deficits and Debt in the “out years”, but it also helps determine what assumptions are reasonable to use for interest rates.
This year I noticed that each of the three budgets used a maximum inflation assumption of 2.1%. So I wondered how well we had done in the past at keeping inflation at or below that rate. Going to the government website for CPI (inflation) I found since 1965 there had only been 7 years (1986, 1997, 1998, 2001, 2003, 2008 & 2010) at or below 2.1%.) Most of those years were during times of recession. Most non-recession years were significantly higher.
From there I looked at the combined assumptions to see what the trends are. I saw reasonably strong growth, decreasing unemployment and low interest rates. My understanding of economics says that during times of growth and reducing unemployment we typically see an increase in inflationary pressures. I believe that was one of the driving factors that caused the Fed to increase interest rates in 2004 (Fed Fund went from 1.00% to 5.25%).
I also looked to see how we have done so far in fiscal year 2011. What I came away with is we have nearly matched the 1.3% assumption for this year during the first 5 months (Oct ’10 to Feb ’11). If that’s the case, I’m not sure the assumption for 2011 will prove to be a reasonable one.
Finally I modeled the compounded impact of various inflation rate assumptions to see what impact it would have on year 10 projections. As you might expect, the difference between the factor for year 10 using the budget assumptions (average 2.0%) and what I thought would be a more historically appropriate rate (i.e. 3.5%) is very significant. The impact on interest rates would be quite significant too.
I’m hoping I’m missing something, but I’m not sure what it would be. I even checked to see if there was a precedent for the use of the Fed Target Rate as the maximum inflation rate. That wasn’t the case as the maximum inflation assumption in the 2009 budget and 2007 budget were 3.2% and 3.4% respectively. (I didn’t check 2008.)
I hope you can help me answer the following questions:
- Is it appropriate to use the Fed Target rate as the maximum inflation rate assumption in the budget?
- If not, what would you think would be a good set of inflation assumptions to use? (I thought a 3.5% to 4.0% average would be more reasonable.)
- If the inflation rate assumption is understated, doesn’t that mean the interest rate assumptions (especially 91 Day Treasury rate) are also understated?
- What would you think would be good assumptions for interest rates if you believe they are understated?
Again, my lack of advanced economic training may be causing me to miss something, but this looks like such a basic error that it almost appears to have been done on purpose. The combination of these issues results in such a significant understatement of Outlays, Deficits and Debt in out years it allows for the appearance of fiscal restraint when in fact reasonable projections would show a true crisis.
I’ve come to the conclusion that it would make sense to reforecast the budget so we have better numbers to look at and Congress has better numbers to make decisions from. What do you think?
I welcome your feedback.
Sincerely,
Alan R. Davis
Private Citizen
CC: Jacob J. Lew, Director
The Office of Management and Budget
725 17th Street, NW
Washington, DC 20503
Douglas Elmendorf, Director
Congressional Budget Office
Ford House Office Building, 4th Floor
Second and D Streets, SW
Washington, DC 20515-6925
Sen. Kent Conrad
Chairman, Senate Budget Com.
530 Hart SOB
Washington, DC 20510
Rep. Paul Ryan
Chairman, House Budget Com.
1233 Longworth HOB
Washington, DC 20515-4901
Rep. Bob Gibbs
329 Cannon HOB
Washington, DC 20515-3518
Sen. Sherrod Brown
713 Hart SOB
Washington, DC 20510
Sen. Rob Portman
B40D Dirksen SOB
Washington, DC 20510
Rep. Robert Dold
212 Cannon HOB
Washington, DC 20515-1310
Jim Angle
Fox News
400 N Capitol St NW
Washington, DC 20001
Ben S. Bernanke
Chairman, Federal Reserve Board
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
“Why would they want to do that?” 2012 Budget Inflation Assumptions
"America is not broke," Moore said "the country is awash in wealth and cash ... It has been transferred in the greatest heist in history from the workers and consumers to the banks and the portfolios of the uber-rich." Source: Wisconsin State Journal; dwahlberg@madison.com; http://host.madison.com/wsj/news/local/govt-and-politics/article_8a60e128-4791-11e0-9892-001cc4c002e0.html
Technically he may be right, but it’s not going to help us much to be "technically right".
My background is 30+ years in the healthcare finance field with most of those years at a senior management or CFO level. My training is accounting with a Masters and CPA. So I have a background for what I'm writing. My only concern is for the future of my grandkids and others like them. I'm not sure what Mr. Moore's motivation is?
Something isn't "right".
I started downloading the White House Office of Management and Budget Summary Schedules (found on their website) in 2009 (2010 budget). I was curious how they might have calculated the Net Interest Expense for the budget years. I came away concerned with their overall budget projections since I felt they had used very optimistic assumptions for each of the 5 key budget assumptions (growth, inflation, unemployment, short term interest rates and long term interest rates found on Table S-13). Using overly optimistic values for each of the assumptions would make the resultant projections very unrealistic.
In 2010 (2011 budget) I decided to create historic databases on each of the five key assumptions to test their reasonableness and came away concerned that historical trending couldn't support any of the five, let alone all five of them. That year I calculated the amount of understatement in Net Interest Expense and National Debt would be based on the understatement interest rates. I estimated it to be over $3.5 trillion dollars.
This year I concentrated on what I thought would be the most important of the high level assumptions, inflation. In the budget they call inflation "Consumer Price Index, percent change, year to year". I Googled "CPI" and found a government website from which I could get historic annual inflation numbers. I compared those to the average (2.0%) and maximum (2.1%) inflation assumptions in the 2012 budget. I was stunned with what I found. We've haven't had a decade with a 2.0% average inflation rate since before the 60's and we've only had 7 years, most during recessions, that were at or below the 2.1% maximum inflation rate they show in their projections for the years 2012 - 2021. It turns out they are using the Fed Target Rate for their maximum inflation rate despite the fact we routinely surpass it.
Why would they use such unrealistic numbers in putting out the budget projections. There might be two reasons:
First, compounding. There's is a concept in math and finance called compounding rate. The old example was 7 and 10. If you earn 7% a year for 10 years you can double your money, but if you can earn 10% per year you double it in 7 years." Simply the put, higher numbers double more quickly and lower numbers double slower. Imagine how much longer it takes spending to double at 2.1% inflation as opposed to a more realistic 3.5% inflation. And back in the 70's and early 80's it didn't take long to double at all with inflation over 7.0%. This means they create much more acceptable numbers for Outlays, Deficits and Increase in Debt by using lower inflation assumptions than higher ones. I order to make sure that they weren't doing the same thing other administrations had done, I looked up four other budgets (2009, 2007, 2005 & 1997) and found the maximum inflation assumption for those averaged 3.1%. While still below historical trending, it was significantly above what this WH OMB has used. Finally I tested the 2011 projection of 1.3% against what we've already seen this year (Oct - Sep fiscal year). We've already reached this year's annual assumption In February and still have most of the year left.
The second ties to something Chairman Greenspan used to tell Congress about interest rates. He told them that Interest rates follow trends in inflation and inflation follows trends in government spending. In otherwise, if you project lower inflation rate assumptions, then you can also use lower interest rate assumptions. And the 2012 budget uses very moderate to low interest rates. That in turn results in understating Net Interest Expense, Outlays, Deficits and Increase in Debt. I also found we are currently well above their 2011 average annual 10 Year Treasury assumption of 3.0% with the rate close to 3.5% at the end of February.
So I'm left wondering "What's going on here?" While M. Moore may be technically correct that there is a lot of cash around and we aren't totally broke, we are running very significant deficits and watching our debt increase at an alarming rate. Soon we will be faced by a catastrophic increase in Net Interest Expense that will overwhelm the budget. If you don't believe it, just compare the level of Net Interest Expense we paid in 2010 to what the average annual Net Interest Expense was during the 90's and that was with about one third the National Debt we currently have. That's what a Fed Fund rate under 0.2% will do for you.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
It appears this administration is now using the Budget process as merely a political tool to achieve their ends. Unfortunately it appears their political ends include misleading us as to the extent of the financial crisis we are facing. So ask yourself this. "Why would they want to do that?"
This year's summary schedules show up in Table S-13 on page 202 of the Summary Tables found on the WH OMB website.
2012 Budget = http://www.whitehouse.gov/omb/budget/Overview (choose last item Summary Tables)
Inflation tables = http://www.bls.gov/cpi/tables.htm (choose top item)
Technically he may be right, but it’s not going to help us much to be "technically right".
My background is 30+ years in the healthcare finance field with most of those years at a senior management or CFO level. My training is accounting with a Masters and CPA. So I have a background for what I'm writing. My only concern is for the future of my grandkids and others like them. I'm not sure what Mr. Moore's motivation is?
Something isn't "right".
I started downloading the White House Office of Management and Budget Summary Schedules (found on their website) in 2009 (2010 budget). I was curious how they might have calculated the Net Interest Expense for the budget years. I came away concerned with their overall budget projections since I felt they had used very optimistic assumptions for each of the 5 key budget assumptions (growth, inflation, unemployment, short term interest rates and long term interest rates found on Table S-13). Using overly optimistic values for each of the assumptions would make the resultant projections very unrealistic.
In 2010 (2011 budget) I decided to create historic databases on each of the five key assumptions to test their reasonableness and came away concerned that historical trending couldn't support any of the five, let alone all five of them. That year I calculated the amount of understatement in Net Interest Expense and National Debt would be based on the understatement interest rates. I estimated it to be over $3.5 trillion dollars.
This year I concentrated on what I thought would be the most important of the high level assumptions, inflation. In the budget they call inflation "Consumer Price Index, percent change, year to year". I Googled "CPI" and found a government website from which I could get historic annual inflation numbers. I compared those to the average (2.0%) and maximum (2.1%) inflation assumptions in the 2012 budget. I was stunned with what I found. We've haven't had a decade with a 2.0% average inflation rate since before the 60's and we've only had 7 years, most during recessions, that were at or below the 2.1% maximum inflation rate they show in their projections for the years 2012 - 2021. It turns out they are using the Fed Target Rate for their maximum inflation rate despite the fact we routinely surpass it.
Why would they use such unrealistic numbers in putting out the budget projections. There might be two reasons:
First, compounding. There's is a concept in math and finance called compounding rate. The old example was 7 and 10. If you earn 7% a year for 10 years you can double your money, but if you can earn 10% per year you double it in 7 years." Simply the put, higher numbers double more quickly and lower numbers double slower. Imagine how much longer it takes spending to double at 2.1% inflation as opposed to a more realistic 3.5% inflation. And back in the 70's and early 80's it didn't take long to double at all with inflation over 7.0%. This means they create much more acceptable numbers for Outlays, Deficits and Increase in Debt by using lower inflation assumptions than higher ones. I order to make sure that they weren't doing the same thing other administrations had done, I looked up four other budgets (2009, 2007, 2005 & 1997) and found the maximum inflation assumption for those averaged 3.1%. While still below historical trending, it was significantly above what this WH OMB has used. Finally I tested the 2011 projection of 1.3% against what we've already seen this year (Oct - Sep fiscal year). We've already reached this year's annual assumption In February and still have most of the year left.
The second ties to something Chairman Greenspan used to tell Congress about interest rates. He told them that Interest rates follow trends in inflation and inflation follows trends in government spending. In otherwise, if you project lower inflation rate assumptions, then you can also use lower interest rate assumptions. And the 2012 budget uses very moderate to low interest rates. That in turn results in understating Net Interest Expense, Outlays, Deficits and Increase in Debt. I also found we are currently well above their 2011 average annual 10 Year Treasury assumption of 3.0% with the rate close to 3.5% at the end of February.
So I'm left wondering "What's going on here?" While M. Moore may be technically correct that there is a lot of cash around and we aren't totally broke, we are running very significant deficits and watching our debt increase at an alarming rate. Soon we will be faced by a catastrophic increase in Net Interest Expense that will overwhelm the budget. If you don't believe it, just compare the level of Net Interest Expense we paid in 2010 to what the average annual Net Interest Expense was during the 90's and that was with about one third the National Debt we currently have. That's what a Fed Fund rate under 0.2% will do for you.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
It appears this administration is now using the Budget process as merely a political tool to achieve their ends. Unfortunately it appears their political ends include misleading us as to the extent of the financial crisis we are facing. So ask yourself this. "Why would they want to do that?"
This year's summary schedules show up in Table S-13 on page 202 of the Summary Tables found on the WH OMB website.
2012 Budget = http://www.whitehouse.gov/omb/budget/Overview (choose last item Summary Tables)
Inflation tables = http://www.bls.gov/cpi/tables.htm (choose top item)
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