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Budgetary Black Hole

In this world nothing can be said to be certain, except death and taxes.

-Benjamin Franklin

Now that Mr. Madoff is out of the spotlight, it might be prudent to spend a little bit of time on the biggest ponzi scheme of them all.  The government.  But first, let us try some common sense:

Now that we are all responsible, let us assess the situation.  Since I last reported on this on August 4th, 2009, the actual decline in tax receipts for 2009 versus 2008 was larger than forecasted.  Tax receipts declined by over 16% from 2008 to 2009, but of course government spending skyrocketed by 18%.

Tax Receipts Plummet, Spending Skyrockets

The argument is that the spending was needed in order to pull the financial system from the brink of collapse and to mitigate the chance of another great depression.  This is an argument that we will never be able to prove the validity of, but one that does not hold a lot of water for the 10% of Americans who are fully unemployed or the 1 in 5 who are underemployed.  The fascinating thing to consider is: if we had one time massive government spending to stem the collapse, would we not expect that some time in the near future there would be a large decline in government spending?  Take a close look at the chart;  how many of the years since 1955 do you see red bars above the line showing that government is growing?  Answer: 59 of 61 months.  Well, I guess they do show that government spending will go down by 2% in 2012, after it has grown by 43% since 2007.  Government spending has increased by 7% per year since 1955, vastly outstripping the growth in the overall economy.  Is there not any economy of scale in running a country?  I guess not.

And what about the spending gap over time?

Optimism at its best

The sad aspect is that the output gap between receipts and outlays, which is extremely wide, is vastly optimistic.  The underlying assumption in this hand waving exercise is that GDP will grow by over 5.5% annually between 2011 and 2015! I will let you know when I can find an economist who will back up this fantasy.  In addition to this rosy spending news, the federal payroll is set to hit an all time high of 2.15 million employees.  All with spectacular benefits and great job stability.  And what do these government employees get paid?  Probably more than they should.

Let us live with the deficit and just look at where the money goes.  Considering we have the largest military in the world and are currently fighting two wars, that might seem like a prudent place to start:

Spending on Defense has actually decreased over time as a percentage of total outlays

It seems like the cold war is over and defense is no longer our budget buster.  In fact, the Treasury seems to have bypassed the Pentagon and looks to be accelerating….  So where does the true beast reside?

Healthcare spending consistently rising since 1960

I think we found our generational wealth transfer candidates.  Entitlement programs.

So how are we going to close the gap, especially since GDP growth will not nearly be as high as the 5.5% forecasted by the Office of Management and Budget?  Through taxes, inflation, and entitlement cuts.  Be prepared to cover your own retirement and your own healthcare costs while being taxed at an ever increasing rate through inflation and income tax.  If you believe that the taxes will only affect the rich, please be sure to read the fine print.

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