Federal budget update

The federal deficit in the 12 months ending August was just over $1.5 trillion, or about 10.5% of GDP. The major causes of deficits in the past have been collapsing revenues. This time we have not only collapsing revenues but soaring expenditures. Revenues look like they might bottoming later this year, with the  3-mo. annual spending rate falling at an 11% rate today versus a 28% rate just a few months ago. But spending is growing at almost a 20% annual clip over the past 3 and 6 months, and we have yet to see the bulk of the $787 billion spending package get spent. And then of course there is the additional spending that would be triggered by healthcare reform if it passes, according to the CBO.

John Stossel had a nice piece yesterday on reason.com that outlines what Obama should have said to Congress the other night. If the numbers above paint a grim picture, then the long-term budget outlook looks downright catastrophic. Excerpts:

In 1964, President Johnson won a landslide victory—quite similar to mine. His election also brought liberals into Congress. The next year, they created the first government-run health care plan: Medicare.

They meant well, but unfortunately, this was the height of fiscal irresponsibility. I know Medicare is popular with the elderly. Of course it is. Everyone likes getting free things. But it is unsustainable.

Retirees believe that their Medicare bills are paid from a "trust fund" that was created with deductions from their paychecks. But this is a politician's lie.

In truth, our predecessors spent every penny of those contributions immediately. They spent them on wars and pork that helped them get re-elected. The money for current retirees' health care is taken from today's workers.

This Ponzi scheme worked for a while. But then ... the average life span increased from 71 to 78 years. When Medicare began, there were five workers for every Medicare recipient. Now there are only four. And by 2030, the Board of Medicare Trustees expects there to be just 2.4. Unless millions of new young workers suddenly arrive from some other planet, there is no way that there will be enough workers to pay the Medicare benefits that we politicians have promised. Medicare's unfunded liability is $37 trillion.

Therefore, today I apologize for defending the absurd health care bills that have emerged from your committees—proposals that would add trillions of dollars of additional debt to an already unsustainable system.

The only way to avoid Medicare's collapse is to get retired people onto private insurance plans that they pay for themselves.

And the only way to address our overall budget deterioration is to rein in spending and entitlement programs, not to keep expanding them.