Quanta Analytics

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Quanta Analytics

• Federal Government Budget Overview
• Some Things Are Just Too Important
• Not to Understand

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Federal Budget OverviewSome Things Are Just Too
Important not to Understand

• During earlier periods of our most recent
  financial crisis, Quanta Analytics spent most of
  its time tracking and monitoring changes in the
  Banking Industry and setting up QAs process for
  continually monitoring that industry. With much
  of that work complete and in place, QA has turned
  its attention towards the Federal Budget and the
  Federal Deficit.
• There are some things that are just too
  important not to understand and our Federal
  Government Budget process that has lead to our
  substantial National Debt is one of those things.
• In this Overview presentation Quanta Analytics
  will show and explain, using fifty-years of
  Federal Government Budget history, what all the
  hub-bub regarding the Federal Budget and
  National Debt is all about.
• Additional details regarding the Federal Budget
  are presented in follow-up presentations
  associated with this one.

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Introduction to Federal Budget Overview

• The financial information appearing in this
  presentation is obtained from the historical
  tables regarding the Budget of the U.S.
  Government as presented in the Financial Report
  of the United States provided through the
  Financial Management Service.
• The analysis herein is the work of a single
  individual, Jim Boswell.
• Jim is the Executive Director of Quanta
  Analytics.
• He has an M.B.A. from the University of
  Pennsylvania, The Wharton School,
• An M.P.A. from Indiana University, School of
  Public and Environmental Affairs and a
• B.A. in mathematics from Hanover College
• Jim is a veteran, who served as a junior officer
  on a fleet ballistic missile submarine
• Jim worked as a Budget Analyst for the Department
  of Energy during the first energy crisis
• Later, he worked for PricewaterhouseCoopers LLP
  for 15 years prior to starting his own think
  tank.
• In 1995 Jim was awarded a Vice-Presidential
  Hammer Award for his work designing the primary
  systems used by Ginnie Mae to monitor the risk of
  their portfolio.
• Jim was integrally involved in analyzing data and
  developing solutions throughout the SL crisis.
• Jim is the author of Crush Depth Alert, subtitled
  Solutions for Supplying Power to Americas
  Distressed Financial Systems
• And he regularly writes opinion pieces for
  Business Insider
•  

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Federal Budget OverviewReceipts and Outlaysa
50-Year History

• The following graph is just a warmer-upper.
  What it shows is the actual 50-year history
  (1962-2012) of Government receipts (revenues,
  taxes, in-flows, etc.) plotted against the amount
  of Government outlays (expenditures, spending,
  out-flows) for every year during that period of
  time.
• There is little that Quanta Analytics expects the
  viewer to pull away from this particular graph
  however, it does begin to provide a sense of how
  the Federal Budget has grown over the years.
• Later graphs will break this information down
  into more meaningful perspectives.
• Right up front Quanta Analytics wants to caution
  the viewer not to lose sight of the Big Picture
  by focusing solely on the last few years of
  budget history. The problems with the Federal
  Budget that Quanta Analytics will describe cannot
  be laid at the feet of the current Administration
  nor can it be laid at the feet of one particular
  political party (Democrat or Republican) in
  general.
• The Federal Budget problem is an American
  problem and one that has been overlooked by
  Presidents (who submit budgets to Congress and
  manage the Executive agencies that do the
  spending) of both parties and Congresses (who
  appropriate spending levels) of both parties for
  more than fifty years.
• Both parties must share responsibility.
• Now with that being said, let us move on.

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Fifty Year History of Federal GovernmentReceipts
and Outlays(1962-2012)
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Federal Budget OverviewRevenues and Outlays
Compared to U.S. GDP

• Probably the best perspective one can gain
  relating to the Federal Budget history is to look
  at revenues and outlays in relation to the U.S.
  GDP. The following three graphs will provide
  that perspective. And this perspective should be
  telling and understood.
• The first graph in this series shows that
  although Federal Revenues have varied in relation
  to the GDP at different times in our history, on
  average they have been at levels representing
  18.1 of our GDP.
• The second graph in this series shows that
  although Federal Outlays have varied in relation
  to the GDP at different times in our history, on
  average they have been at levels representing
  20.8 of our GDP.
• The third graph in this series shows that this
  variance between Federal Revenues and Federal
  Outlays is not just a recent phenomena, but one
  that has been steady and in place for nearly
  fifty years.
• Again, Quanta Analytics cautions the viewer not
  to focus on any particular period during the
  fifty-year period time (including the most recent
  period). It serves no purpose at this time to
  point fingers or place blame. This 2.7 gap
  between the Revenue/GDP ratio and the Outlay/GDP
  ratio is at the heart of our National Debt
  problemand this problem has been an ongoing one
  for the last fifty years.
• This 2.7 GDP gap actually represents a 15
  difference (20.8/18.1) between actual revenues
  and actual outlays. But we cannot stop here.
  Things are actually worse as we will come to see
  in later graphs.

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Fifty Year History of Federal Government
Revenuesas a Percentage of GDP (Plotted Against
the 50-Year Average of 18.1)
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Fifty Year History of Federal Government
Outlaysas a Percentage of GDP(Plotted Against
the 50-Year Average of 20.8)
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Fifty Year History of Federal Government Receipts
and Outlaysas a Percentage of GDP(1962-2012)
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Federal Budget OverviewLooking at Accumulated
Deficits Resulting from 2.7 GDP GapBetween
Federal Revenues and Outlays

• When Outlays exceed Revenues, the result are
  Deficits. When Revenues exceed Outlays, the
  result are Surpluses. The following two graphs
  show how the historical gap between Government
  Revenues and Outlays has lead to an accumulated
  buildup in our Federal Deficit.
• The first graph of this series simply shows how
  the Budget Deficit has grown over the past
  fifty years.
• The second graph of this series offers a
  comparison to that Budget Deficit accumulation,
  showing what the Budget Deficit would have
  been
• (1) If Federal Outlays had been steady at
  18.1 of GDP over the last fifty-years keeping
  actual Revenues the same or
• (2) If Federal Revenues had been
  steady at 20.8 of GDP over the last fifty-years
  keeping actual Outlays the same.
• But stick around. This is just the starting
  point.

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Fifty Year History of Federal GovernmentAccumulat
ed Result of Total Deficit Spending(1962-2012)
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Fifty Year History of Federal GovernmentDeficit
SpendingActual versus Hypothetical
Cases(1962-2012)
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Federal Budget OverviewComparing the Budget
Deficit to the National Debt

• However, Budget Deficit numbers, by themselves,
  do not tell the full story of our American
  problem.
• The next two graphs begin to explain why our
  Budget problem is actually worse than what we
  have explained so far. Besides spending more
  Outlays than Revenues, our American parties
  have also been robbing Peter to pay Paul. In
  other words, our National Debt is even greater
  than our Federal Deficit.
• The first graph in the next series shows the
  difference between the National Debt and our
  Federal Deficit.
• And the difference between our National Debt
  and our Federal Deficit is explained in the
  second graph of this series. For fifty years we
  have been taking Social Security Revenues
  designed for future Outlays and using them to
  cover current Outlays. In truth, if you only
  count Social Security revenues that are used to
  cover current Social Security outlays, the true
  amount of Federal Revenues has averaged only
  16.4 of GDP, compared to the earlier figure
  expressed as 18.1.
• Thus, in truth, the real gap between current
  Outlays and Revenues meant for current
  expenditures is a gap, not of 2.7 of our GDP
  like we showed before, but instead a gap of
  nearly 4.4 of GDP. In other words, the history
  of our spending gap essentially represents nearly
  a 27 difference (20.8/16.4) between current
  Revenues and current Outlays, rather than the 15
  gap (20.8/18.1) explained before.
• Dont leave yet. We are not done. The story
  gets even worse yet.

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Fifty Year History of Federal GovernmentActual
Deficit Spending versus Actual National
Debt(1962-2012)
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Fifty Year History of Federal GovernmentAmount
of National Debt We Owe Social Security(1962-2012
)
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Federal Budget OverviewComparing the National
Debt Against GDP

• Now no one should expect the Federal Government
  to always run a balanced budget. In fact, most
  economists and realists would expect the
  Government to show deficit spending during
  periods of war and national recessions/depressi
  ons.
• Regardless, probably the best way to gain a sense
  of our National Debt in economic terms is to
  compare it to our GDP.
• The first graph in the next series, shows how the
  relationship between our National Debt and our
  GDP has changed over the last fifty years.
• The second graph in this next series, goes back
  even further, and shows how that relationship
  changed over the last eighty-years.
• Hopefully, by looking at the two graphs
  separately we can begin to gain a better scope on
  our current American problem.

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Fifty Year History of National Debtas a
Percentage of GDP(1962-2012)
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Eighty Year History of National Debtas a
Percentage of GDP(1930-2010)
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Federal Budget OverviewComparing the National
Debt Against GDP

• From the previous graph it is clear that our
  National Debt when compared to our GDP has in
  fact been worse than it is today.
• However, there are some things that we cannot
  ignore about todays figures and these include
  the following
• (1) World War II was an extraordinary time
  period and after the war, America began paying
  off for the cost of that war by growing its GDP.
• (2) No war anything like World War II can
  explain the growing trend of our National Debt to
  GDP ratio over the past 30-years. There are
  other causes (to be explained shortly).
• (3) Our current GDP is approximately 14.5
  Trillion and if future Government Deficit
  spending exceeds the expected growth in that GDP
  (14.5 Trillion x 3.5 507 ) then our Debt to
  GDP ratio will also continue to grow. If we grow
  our GDP less than 3.5 the problem even becomes
  more difficult to solve.
• (4) Ten percent unemployment works
  against the Federal Budget by reducing Federal
  Revenues and increasing Government outlaysand
  thus increasing Federal Deficits and finally
• (5) To begin reducing the size of our
  National Debt or even keeping it relatively level
  we will need to raise revenues, decrease
  spending or raise our GDP and probably some
  combination of the three.
• Now here is the rub. Lets look at the source of
  the Federal Revenues that we have been talking
  about first by looking at the relative
  contribution of that revenue by source.

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Fifty Year History of Federal Government
ReceiptsShowing Percentage by Type(1962-2012)
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Federal Budget OverviewFederal Revenues or Taxes

• Of the three options available (raising taxes,
  reducing spending, or growing our GDP) to manage
  our debt in relation to our GDP, raising taxes
  always seems to be the option of last choice.
  Its better to increase taxes by growing our
  economy (GDP) than it is to raise tax rates
  themselves. Even so, QA feels that it is
  important to understand the history and relative
  source of the revenues used to cover Govt
  expenditures.
• The previous graph showed this and indicates the
  following
• -- Individual income taxes represent the
  source for approximately 45 of all federal
  revenues
• -- Social security payments represent the
  source for approximately 35 of all federal
  revenues
• -- Corporate taxes represent the source
  for approximately 10 of all federal revenues
  and together
• -- Excise (e.g. alcohol, tobacco, highway
  trust funds, etc.) and Other (e.g., estate,
  customs) taxes represent the source for the
  remaining 10 of all federal revenues.
• The previous graph also shows that between
  1962-1982 as the relative amount of Federal
  Revenues associated with Social Security grew to
  become somewhat of a steady level of 35 all
  revenues, they did so while the relative
  proportion of Corporate and Excise taxes fell
  during that same period.
• Now assuming we cannot raise taxes to help tackle
  the growing Budget Deficit problem in America,
  then we have to look toward expenditures. The
  next graph shows expenditures by Government
  function.

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Fifty Year History of Federal Government
OutlaysShowing Percentage by Outlays by
Type(1962-2012)
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Federal Budget OverviewFederal Expenditures or
Outlays

• It is very clear by looking at the relative
  change in expenditures by government function as
  the American Government grew it shifted its focus
  more towards butter than guns.
• Over the past fifty years the Human Resource
  category grew from representing 30 of all
  Government expenditures to now representing
  approximately two-thirds of all government
  expenditures.
• Over that same period, spending on Defense
  decreased in relative terms from representing 50
  of all Government expenditures in 1962 to its
  present level of approximately 20 today.
• Despite an increasing Budget Debt, net interest
  expenditures have benefited from lower interest
  rates and has remained at approximately the same
  of 10 of expenditures.
• So all in all, when you add everything up
  (knowing that it is hard to reduce interest
  payments without reducing debt) you find outside
  of Human Resources and Defense there is little
  left to look at when looking for significant
  places to cut.

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Federal Budget OverviewSummary

• Federal Budget Deficits increase our National
  Debt.
• Over the past 50-years Federal Outlays have
  consistently outstripped Federal Revenues by more
  than 25.
• Our National Debt is growing faster than Budget
  Deficits because we owe ourselves money for using
  future Social Security funds to pay for
  current Federal Government outlays.
• Outside of the period during World War II our
  National Debt to our National GDP is the highest
  in history.
• And the current trend for this ratio is and has
  been rising.
• Human Resources account for approximately 67 of
  all Federal Outlays
• Defense Spending accounts for approximately 20
  of all Federal Outlays
• Based on the most current numbers from the
  Financial Report of the United States shows or
  projects
• 2012 Federal Government Outlays 3.632
  Trillion
• 2012 Federal Government Revenues 3.075
  Trillion
• (and this does not take into account 294 billion
  of future Social Security funds used to cover
  current Outlays)

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This EndsQuanta Analytics Federal Budget
Overview

• More Details
• Are Provided in Subsequent Presentations