Hello Everyone,

All eyes are on Washington these days as we approach the dreaded debt ceiling. Endless talk about “debt and deficits.”

So, I thought a little perspective might help. I have long tried to follow the admonition of a longtime investment banking colleague – that to get to the truth you have to “look it up”. Amherst drove that home, too. Get the facts from primary, not secondary, sources; reach your own conclusions; don’t simply accept those offered by others.

Let’s focus on the topic of the day – deficits. With the help of our son, Peter (who runs an investment partnership), I have looked at raw data provided by the Office of Management and Budget covering several decades. They reveal some illuminating facts relevant to today’s superheated political debate. Look at the data and make your own observations. Here are some of mine.

  1. Deficits are common; surpluses are rare. Deficits have been with us for a very long time. In Attachment A, you will notice that there have been Total Surpluses in only 13 of the 81 fiscal years from 1930 to 2010, or 16% of the time. Since 1960, there have been Total Surpluses in only 5 years – 1969 and 1998-2001. (“Total Deficits” and “Total Surpluses” are defined as the sum of “On-Budget, Social Security, and (humorously) Postal Service Receipts and Outlays” — see column headings in Attachment B. Using percentages of Gross Domestic Product makes the most sense to keep absolute dollars in perspective).
  2. On-Budget Surpluses are rarer still. They have occurred only in one year since 1960 – in 2000 – and 1999 was essentially breakeven (Attachment A).
  3. A Revenue-induced Surplus. In 2000, one could assume that extraordinary capital gains tax collections – resulting from the tech stock bubble, a non-recurring event – were largely responsible for the large increase in Individual Income Taxes. That may have accounted for the entire Surplus that year, the only one in over 40 years (Attachment C).
  4. Deficits are bipartisan. Not a single presidential term, whether Republican or Democratic, has been deficit-free since 1930 (Attachment A).
  5. Revenues matter, not just spending. From 1983 (the middle of President Reagan’s first term) through 2008 (the financial crisis), the country enjoyed an unprecedented period of prosperity – some of which, in hindsight, seems to have been illusory. During this 26-year period, On-Budget Receipts averaged 13.4%. In 2009 and 2010, they fell to the 10% range, their lowest since 1942 (the year I was born!) (Attachment A). Our recent large deficits are the result of both higher spending and very low tax receipts.
  6. Surpluses don’t last long. In the ballyhooed years of Total Surpluses from 1998 through 2001 – overlapping the Clinton and Bush administrations – this rare phenomenon was expected to last for years and quickly extinguish the entire national debt. In 2000, it was widely reported that “…both the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) are forecasting that these surpluses will continue over the next decade, in amounts large enough that the public debt will be fully redeemed in 2012” [emphasis added; Brookings Institution, Jan. 1, 2000]. These years of Total Surpluses were also misleading, since there was only one year of meaningful On-Budget Surpluses – 2000 – see point 2, above.
  7. Wars” are expensive. Warren Buffett described the financial crisis as an “economic war” and 2008 as our “economic Pearl Harbor.” The implication was that our government has to engage in extraordinary spending in both “military wars” and “economic wars” to preserve the two pillars of our American way of life – democracy and capitalism. In 1983, President Reagan was fighting to recover from the severe recession that Paul Volcker induced to break runaway inflation – that, in turn, led to unemployment approaching 11%, higher than it was in the most recent recession. Notice that his On-Budget Outlays exceeded 19% — close to the spending levels in 2009 and 2010 (Attachment A).
Type of “War” Fiscal Year On-Budget Outlays (%GDP)
Military 1942 24
1943 44
1944 44
1945 42
Economic 1983 19
Military & Economic 2009 21
2010 20

As I look at these data, I reach many conclusions. You undoubtedly will reach your own.

  1. Long-term habits (like addictions to debt) are exacerbated by the effects of compounding and are not quickly or easily broken. (See Obamagram entitled “Culture of Addiction and Impatience” – 3/12/09 – Group 5, Item 4 – on our website).
  2. We are all culpable because we have used, or have permitted the use of, excessive debt throughout our society for decades. The government’s deficits and debt simply reflect our collective lack of discipline.
  3. Speaker Boehner said again Tuesday night that as a former small businessman he knows that you can’t “spend more than you take in.” True. But, he knows, but won’t say, that you also can take in more. In any business, there is always a balance between growing revenues and cutting expenses.
  4. During good economic times, we should produce federal budget surpluses to support deficit spending needed in bad economic times. As Larry Summers said when he was Secretary of the Treasury during the last Surplus year, in good times we need to “reload the fiscal cannon.”
  5. A “balanced budget amendment” would tie our hands during times of “war” – military or economic.
  6. Balance between revenues and spending (as President Obama has been emphasizing) and compromise are essential to finding a healthier fiscal footing.

Geoff Nunberg, a linguist at the University of California at Berkeley, was interviewed on NPR recently about the meaning of the word “compromise:”

…compromise is the basis of human society itself. Edmund Burke put it succinctly in 1775 in a famous speech calling on the British Parliament to conciliate with the American colonies. “All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise.”

“Compromise” is what Freud would have called an ambivalent word… [it] faces in two directions. It looks forward to the bargains we strike, but it also looks backward at what we had to sacrifice to get there…That backward-looking meaning is always in play when people reject the word. “I am not going to compromise on my principles…”

…[but] nobody gets through a week without realizing they’ve compromised their principles…And politicians understand that they have to shave a little off their convictions to get anything done – as Burke said, that’s what it means to govern in a democracy.

Please, as always, pass it on. And, remember that previous Obamagrams are stored on http://obamagrams.com.

Chuck

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adobe pdf file Attachment: Attachment A

 

adobe pdf file Attachment: Attachment B

 

adobe pdf file Attachment: Attachment C

 

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