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The United States Federal Budget Not Based On Reality Under Both Presidents Obama And Trump

Donald Trump, 45th President of the United States

The United States has been accumulating debt at an enormous rate. The federal debt effectively doubled during the Obama Administration. The interest on the debt in the federal budget, is one of the fastest growing allocations, despite historically low interest rates. It already consumes $266 billion USD (United States Dollar) annually.

The federal deficit for the fiscal year 2018 is $440 billion USD. This will cover the period October 01 2017, to September 30, 2018. Despite tremendous revenues and tax receipts of $3.654 trillion USD, government spending remains far higher at $4.094 trillion USD.

As worrisome, is the rapid acceleration in the government debt to GDP (Gross Domestic Product) ratio. From 64.8% in 2007 and a rise to 87% in 2008, it already breached 100% back in 2012. It was close to 106% at the end of 2016, its highest rate since the height of World War II.

When the GDP to debt ratio exceeds 100%, is when most financial analysts caution, that a nation is approaching bankruptcy.

Deficit and Debt Increases 2001–2016

A further problem, is the unfunded government liabilities, that already exceed $120 trillion USD.

Many people continue to blame the enormous budget deficits on the 2008 financial crisis. Although it is a contributing factor, there were other events that made balancing the government books, increasingly unlikely.

The recession that began at the end of 2007 and would continue until the beginning of 2009, led to a dramatic drop in government revenues. As the economy contracted, so did the amount of money that would come into federal coffers, through taxation.

From fiscal year 2007, it plummeted from $2.57 trillion USD to $2.1 trillion USD in 2009. Revenues would not totally recover until the fiscal year 2013, when receipts would come in at $2.78 trillion USD.

President Barack Obama signs the ARRA the American Recovery and Reinvestment Act ( the stimulus) into law on February 17, 2009.

In response to the financial crisis of 2008, the Obama administration perhaps unwisely, made the decision that an exceptionally large stimulus was needed in 2009. The $787 billion USD package, extended unemployment benefits, cut taxes and funded a number of public work projects.

A number of analysts have surmised, that a great deal of the stimulus money was wasted by awarding federal money, on pet projects of the new administration. Although politically popular with certain segments of the electorate, many of these undertakings proved to be economically nonviable.

Others will argue that the recession was ending anyway, and there was no need for such a large infusion of government money, into the economy. Some economists will allow a stimulus might have been a good idea, but not at the amounts allocated and not for the many dubious projects, that received federal funding.

U.S. Army soldier of the 10th Mountain Division in Nuristan Province, in Afghanistan, June 2007

The War on Terror that began in response to the attacks on the United States in September 2011,in a series of events known as 9/11, led to a spectacular increase in military expenditures.

In less than a decade, defense spending would practically double. It would rise from $437.4 billion USD in 2003, to $855.1 billion USD by 2011.

This fiscal year ending in September, the military will be provided $593 billion USD.

However, the largest government expenditure is the mandatory spending, that will continue to increase. These are collectively known as entitlements. They include Medicare, Medicaid, federal retirements and various payout programs, that come under the banner of Social Security. The latter alone, now tops $1 trillion USD on an annual basis.

Risks due to increasing entitlement spending, according to GAO’s projections of future trends.

The total for entitlement spending has been above $2 trillion USD, since fiscal year 2011 and continues to grow in size at an exponential rate.

Entitlement reform was never really considered, during the eight years of the Obama Presidency. Now it has been largely taken off the table, by President Trump as well.

Without a restructuring of these programs, balancing the federal budget becomes almost impossible, in the present political environment.

The last year of the Bush Presidency before the financial meltdown was in 2007, the deficit that year was just $161 billion USD.

The following year with Democrats back in charge of Congressional spending, and growing signs that the country was in recession, expenditures increased as revenues leveled off.

Then came the financial crisis, in the autumn of 2008. The bailout of the American financial system with infusions of money, to both banks and insurance companies, would begin under TARP (Troubled Asset Relief Program). This would add over $700 billion to the deficit, in the fiscal year 2009 alone.

Then-senator Barack Obama addresses the Senate on the financial crisis and argues in favor of the bailout bill. October, 2008

When you add the stimulus and the bailout funds, the deficit that year exploded from $458 billion in 2008 to $1.413 trillion in 2009. Given the state of the economy and the instability of the banking system, spending on that order may have been justified.

However by 2010, the recession was over and the banks had been saved, yet the deficit came in at $1.294 trillion. It was the same story in 2011 and 2012, with deficits at $1.295 and 1.087 trillion respectively.

This kind of spending was irresponsible with the lack of a national emergency and supposed economic recovery, that had arrived beginning in the second quarter of 2009.

In fact, the Obama Administration had embarked on another new entitlement known as the Affordable Care Act. Later identified as Obama Care, the law would mandate the expansion of medical insurance to millions of individuals.

It was attempting to reorganize, one sixth of the United States economy.

President Obama signing the Patient Protection and Affordable Care Act on March 23, 2010

One can certainly argue the merits of the objective, but the idea that millions more would be covered under health insurance, with no real cost to the government, was either naive or totally misleading.

The government subsidies provided to low income earners to pay for their insurance, along with the payments made to insurance carriers to cover losses, would run into the billions of dollars.

This year alone, the cost to the federal government for subsidies to insurance companies, is supposed to run $7 billion USD.

Millions more would be insured by signing up for Medicaid, an expansion of a state and federal program, that was already escalating in cost at a rapid rate.

What made the deficits hard to manage during these years, was the slow rate of economic growth and no real effort to rein in government spending.

President Barack Obama, winner of the 2012 election with 51.1% of the popular vote.

The re-election of President Obama in 2012, insured that the trajectory in spending would not be reversed, but government was already divided again, since the House of Representatives was retaken by the Republicans in 2010.

To restrain government spending, sequestration was finally introduced in 2013. The act called for across the board budget cuts, in programs throughout all discretionary spending. It was a result of a lack of political bipartisanship, in reducing the enormous growth in government expenditures.

The sequester unfortunately, would level directed cuts on all programs regardless of their effectiveness.

The deficits did begin to head down again, beginning in 2013. The sequester and the recovery of tax revenues to $2.78 trillion, reduced the deficit that year to $679 billion. It would drop further in 2014 to $485 billion and $438 billion in 2015.

Then in 2016, the deficit began to rise once again. The rising costs of entitlements and slowing growth, pushed the shortfall up to $585 billion.

Historical growth of the US economy from 1961-2015

The economic recovery, now third longest since the end of World War II, finished it’s 95 month as of May 2017. It holds another title, in being the slowest recovery on record as well.

The under performing economy, has now made most of the politically popular entitlements, totally unsustainable in their present form.

The growing government regulations passed during the Obama years, have also been holding back the creation and expansion of business. It is estimated that these new ordinances are costing the larger economy, a total of $600 billion annually.

Noncompetitive business and personal tax rates and an increasingly intrusive bureaucracy, prevents higher economic growth rates. If there is any hope in escaping the downward spiral of debt and deficits, it will need the component of faster growth.

Federal government receipts by source, 2010.

The growth rate for 2016 was only 1.6% in 2016. It was a faster at 2.6% in 2015 and 2.4% in 2014. In fact, there was not a single year during the tenure of President Obama, that growth reached 3%.

Too many disingenuous politicians in Washington D.C. the nations capital, refuse to take responsibility for the growing fiscal crisis.

Worse yet, leading Democratic party leaders regularly decry, any attempt slow the growth in government spending. Budget cuts as defined by these politicians, is any reduction in the rate of growth. There has never been very many actual reductions in federal spending.

These same leaders refuse to acknowledge, that the rate of spending is not only unsustainable, but will lead the nation into bankruptcy.

Total Federal Spending in 2015 – $3.8 trillion USD

Although one may be pressed to consider their actions totally self-serving, one may indeed question their economic competence, to handle the nation’s finances.

They seem to be far more concerned with the next election and maintaining control over their various constituencies. Endless pandering to these interest groups, allow them to stay in power indefinitely. That it may be to the country’s ruin, escapes them.

The newly inaugurated President Trump, was elected on the promise of creating more and better paying jobs, as well as returning the nation, to a higher level of economic growth.

Trump taking the oath of office from Chief Justice John Roberts, January 2017

The President has set a goal of doubling growth. He intends to achieve this through another stimulus program that will consist of more deregulation, higher infrastructure spending and tax cuts. The latter will be on both business and personal rates.

The new stimulus for infrastructure alone, calls for spending an additional $1 trillion USD in the years ahead.

Although consumer spending, business investment and inventory expansion will help propel growth, most analysts project economic growth in 2017, to remain below 2.5%.

The problem with the Trump budget is that if growth does not return to a higher rate of growth between 3 and 4%, the deficits will necessarily explode.

As aforementioned, he has ruled out most entitlement reform, at least for now. The President proposes an increase in military spending of $54 billion USD. This practically negates all the savings, that were achieved, through cuts elsewhere in the proposed budget.

It is important to note, that many of these planned reductions in spending, will never be fully approved by Congress.

The Trump plan calls for a cut of more than $800 billion USD from Medicaid and other social programs. The long term effort,schedules a reduction in government spending of $3.6 trillion USD over 10 years. At the end of the decade, the projection is the deficit will be eliminated and be back in balance.

Comparison between U.S. states and countries by GDP in 2012.

The creators of the Trump budget are forecasting economic growth of at least 2.3% in both 2017 and 2018. By 2020, the economy will be growing at a rate of 3% or higher and will remain at this level until 2027.

The problem with the Trump budget plan is that it remains based on the assumption, that the current economic expansion that began in 2009, will last until December 2027. This would be a historical unprecedented 222 months, or more than 18 years. This is an unlikely scenario.

The whole enterprise is a continuation of unrealistic suppositions and a total denial, of how political gridlock, will doom most of the budget plan.

The financial crisis of 2008 and 2009, followed by the foolhardy policies in the ensuing years, has led the United States to an increasingly precarious position.

President Obama and President-elect Trump meet in the Oval Office on November 10, 2016, two days after the election.

There are many political leaders who continue with the expectation, that the Federal Reserve Bank (Fed) will be able to navigate a financial path, to a soft economic landing. The monetary policy of the central bank, has led to historical low interest rates and an infusion of some $4.5 trillion USD into the economy.

As the Fed attempts to unwind the years of quantitative easing and move slowly back towards more normal interest rates after a decade, the strain on the economy cannot be underestimated. These monetary policies have created distortions in the economy, as well as a massive over inflation of asset prices.

This in turn has contributed to the run up in equities and why the share value of stocks, have reached their present high levels. As money continues to pour into the stock market, the result of having few other investment opportunities, the likelihood of a major correction continues to grow.

Neither the federal government nor the Fed ,will be in the position to deal with the next financial crisis, which draws ever closer. Much of their capability to further influence the economy, has already been spent.

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