Deficit Attention Disorder

By Annaly Capital Management

Senator Rand Paul is on the tape promising to unveil a budget with $500 billion in expense cuts in one year, and that he will not spare any government program or agency from his scythe, including the Defense Department, the Education Department (he would eliminate it altogether) and entitlement programs. As he told POLITICO, “These are not without ambition.”

Ambition is what is needed in order to sufficiently tackle the structural budget problems facing our country, but ambition is a curious thing on Capitol Hill. Solo ambition is a virtual non-starter, and likewise there are no guarantees on the ambitions of small, bipartisan groups. Witness the abbreviated life of the National Commission on Fiscal Responsibility and Reform’s report, “The Moment of Truth,” which ambitiously set forth a plan to achieve nearly $4 trillion in cumulative deficit reduction through 2020. The report wasn’t even passed by its own authors.

One of these days, Congress will hopefully get around to living up to its deficit-cutting ambitions. The problem is clear enough. The graph below shows the rolling 12-month Federal deficit, which shows how big the hole is (over $1.3 trillion for the 12 months ended December 2010). We almost feel guilty for not showing the federal debt graph at the same time, because those deficits only get funded through borrowings. The deficits and the resulting rise in outstanding debt is the main item referenced whenever the ratings agencies start talking about downgrades (most recently by S&P and Moody’s just last week).

On a monthly basis, the graph below shows that the US hasn’t had a positive budget month since September 2008, a 27-month stretch, which is the longest stretch since at least 1954, which is as far back as we’ve seen the data. Also, since September 2008, there have been nine months where the monthly deficit exceeded $150 billion, which is more than the average annual deficit from 1980 to 2007.

Clearly, the states and cities are well ahead of the federal government in taking the politically difficult steps to rein in structural deficits. In 2009 and 2010, budget problems at the state level prompted legislators to close more than $250 billion in deficits. There is still a lot more wood to chop, but it sounds like the states have gotten Rand Paul’s memo. As the New York Times reported on January 17, over two dozen inaugural addresses by governors included variations on the same theme for fixing the problem: “Slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if it means tackling the thorny issues of public employees and their pensions.”

With regard to taking the direct approach to dealing with public pension fund shortfalls, the Pew Center on the States reports that through the first 10 months of 2010, 18 states took action to reduce their pension liabilities—either through reducing benefits, increasing employee contributions or both. “It took years for states to get into their current pension predicaments,” reported the Pew Center, “and it will take years for reforms and fiscal discipline to get them out.”

Reforms and fiscal discipline. Ambitious indeed.