Commentary by Robert Kleine: Answers to a Few Simple Questions

How much does the payroll tax cut cost?

About $20 billion for two months and $120 billion for a full year.

How much do the Bush Tax Cuts cost?

About $400 billion annually.

Why are the Republicans demanding the payroll tax cut be fully paid for?

The easy answer is to keep the deficit from increasing but there was no such demand for the Bush tax cuts.

What do the Keystone Pipeline, a freeze on Federal workers pay and cuts to regulation have to do with the payroll tax cut?

Nothing, but this is what the Republicans are demanding for a full year extension of the tax cuts. This is why the Senate adopted only a two-month extension until these issues could be resolved. I believe they should be resolved on their own merits with an up or down vote on each issue.

Is this a jobless economic recovery?

Not really. Private payroll employment has increased by 2.95 million since employment bottomed out in February 2010. During the last recession employment bottomed out in September 2002 and it took until June 2005 for the economy to add 2.95 million jobs. Admittedly the 2008-2009 recession was a much more severe recession than the previous one and normally one would expect faster employment growth. One difference this time is that government employment has declined by 1 million since the May 2010 peak while government employment changed little during the last recession.

Can Ron Paul Cut $1 trillion out of the Federal Budget in the first year  as he claims if he is elected President?

Not in your dreams or more appropriately, your nightmares. This is a simple question but the answer is a little complex. One has to look at the composition of Federal spending.

Interest on the debt- $264 billion

Social Security- $727 billion

Veteran's Support- $63 million

Military and Civilian Retirement- $141 billion

Interest on the debt could not be reduced and Social Security costs could not be reduced in year one unless benefits to current recipients were cut, which no one would support. Retirement costs could not be cut in year one and it is unlikely that veteran's benefits could be reduced at all. These costs are going to rise significantly in future years due to all the soldiers wounded in Iraq and Afghanistan.

Medicare- $572 billion

Medicaid- $273 billion

The costs of programs are increasing because of rising health care costs and increasing caseloads. Keeping costs unchanged requires cuts of up to 10%. But let's assume that overall costs could be cut 10%, which would be very difficult- the savings would be about $85 billion.

Defense- $710 billion

Defense is already scheduled to be cut and you are hearing the screaming already. I don't see how cuts of more than $100 billion are feasible but Ron Paul might argue for more as he wants to sharply reduce our military commitments.

Income Support- $343 billion

This includes programs such as unemployment insurance, child nutrition, and aid to low-income families.

Given the state of the economy and the rising poverty rate, large cuts would be very difficult. A 10% cut would save about $34 million.

Rest of Budget- $563 billion

This includes funding for the rest of government such as for Justice, courts, health research, state, national parks, environment, aid to state and local governments, etc.

If we assume a draconian cut of 25%- highly unlikely -the savings are $140 billion.

The total savings from all these cuts is $359 billion and it would be quite painful. The actual cuts would actually be higher because of inflation such as rising health care and energy costs, aging population, and increasing caseloads due to the weak economy.

The U.S. already spends less than most all other developed nation. Only two OECD nations have lower taxes than the U.S., Mexico and Chile. Cutting $1 trillion from the Federal budget would move us a long way towards becoming a third rate nation.

Is the Federal Budget Facing Huge Deficits Well Into the Future?

No. The CBO is projecting a deficit of "only" $205 billion in 2015. This assumes normal economic growth and the expiration of the Bush tax cuts at the end of 2012. Assuming CBO's projections are accurate, only relatively modest budget cuts would be required to balance the budget. However, funding issues for Medicare and Social Security would still need to be addressed.

Robert Kleine

December 22, 2011


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