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April 7, 2010


Last week, the CBO downgraded that 10 year deficit outlook from more than $4 trillion to over $7 trillion.  After what we’ve learned about Social Security recently, that $7 trillion could easily be over $8 trillion, which means that U.S. would hit $20 trillion in debt by the end of the decade.  However, the same study found that 57% of the problem was related to revenue while only 43% of the problem was related to spending.  I will explain why I am not buying this.
Corporations in this country had a plunge in sales as a result of the financial crisis and the deep recession that followed.  They could have deployed and invested in more resources to chase increased sales or they could have reduced their costs.  Can you guessed what Corporate America decided to do?  Furthermore, can you guess what happened to the companies that were more dependent on sales?
Costs were cut through the decreases in employment and a focus on efficiency and productivity.  Today, productivity in Corporate America is at an all-time high and profitability is very strong.  What is relevant in this discussion is that while business had a revenue problem, they cut their costs (spending) in order to keep their corporations solvent.  Had this not been done, an even greater number of jobs would have been shed throughout this year.
The reason I am making this argument is because the CBO downgrade leaves the door open for government to raise taxes as opposed to make cuts in spending.  It seems to me as if the government (as is argued Wall Street), got dependent on the wealth that was created by the last cycle of economic growth.  Now, unlike any other entity (individual, business, not-for-profit) the government may not cut spending in order to keep itself in solvency, but try to raise revenue through next taxes and permanently increase spending through new entitlement programs.
Let’s examine a history of government revenue and spending since 1984, combined with the projections from the White House out to 2014.

As we look at the trend lines, I believe that spending is a bigger issue than revenue.  There are also other types of trends we (and the government) need to deduce from this analysis.
1)      Government revenues decreased during the last recession (2001-03).  While the left may argue that this was a result of the Bush tax cuts, I think we can look at this recession and determine that government revenues now and in the future will decline during recessions. 
2)      How can we absorb that level of debt in future recessions if massive amounts of spending are required to save us from a depression?  Looking at the spike in the above chart in spending in 2009, did that much spending really do anything to pad this recession?
Is anyone comfortable with the above chart looking down the road to the future?  There is no doubt that if the government does not have the guts to cut spending, they will, without a doubt, raise revenues (or attempt to raise revenues) through increased taxes.  Next week, I will be examining various taxes that are quietly being raised behind the scenes.

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