Mr. Bernanke's Game of Congressional Chicken

In light of Mr. Bernanke's recent comments about playing a Congressional game of chicken with the debt ceiling, I thought that a brief look at the latest Monthly Budget Review for the month of May 2011 from the Congressional Budget Office would be in order.

For the first 8 months of fiscal 2011, the federal budget deficit reached $929 billion, $6 billion higher than the deficit for the first eight months of fiscal 2010.  Outlays rose by 6 percent and revenues rose by 10 percent on a year-over-year basis.  The deficit for the month of April alone was $40 billion and is estimated to be $59 billion for the month of May.  Outlays dropped by $48 billion compared to May 2010, however, most ($42 billion) of this drop is due to reduction in outlays for TARP.  The $6 billion difference from the previous fiscal year sets the United States on track for another $1.5 trillion deficit, the third year in a row that the deficit has exceeded $1 trillion.

Let's look at the revenue side of the ledger first.  On a year-over-year basis, Treasury receipts grew by $139 billion (10 percent) for the first 8 months of fiscal 2011 to $1485 billion.  Individual income taxes rose by a rather stunning 28.5 percent from $546 billion to $702 billion.  On the other hand, corporate income taxes rose by a rather paltry 4.8 percent from $81 billion to $85 billion.  Who said that Main Street Americans aren't paying more than their fair share!  Most impressively, everyone's friends at the Federal Reserve contributed an additional $9 billion to the American Treasury, based mainly on increased earnings on their larger portfolio (of QE Treasuries?).  

Now let's look at the spending side of the ledger.  Outlays for the first 8 months of 2011 rose 6 percent or $132 billion to $2414 billion.   Spending on unemployment benefits dropped the most, decreasing by 22.9 percent on a year-over-year basis largely because of declining unemployment (shocking!) and lower average benefits (not shocking!).  The largest spending increase on a year-over-year basis was on net interest on the public debt which should surprise no one.  In the first 8 months of fiscal 2011, net interest rose by 16.1 percent to $176 billion, nearly what the federal government spends on Medicaid.  Social Security spending was up 3.6 percent to $478 billion, Medicare spending was up 3.8 percent to $303 billion and Medicaid spending was up 5.4 percent to $189 billion.

Let's take a quick look at the "Debt to the Penny" number for today just to put things into perspective:

Certainly, as the world's number one central banker has recommended, Congress could stop playing politics and raise the debt ceiling for the umpteenth time once again, making the current debt ceiling the new debt floor.  Unfortunately, that is like sticking another finger in the fiscal dyke.  It solves nothing.  It is interesting to note that, on the spending side for fiscal 2011, the largest year-over-year increase was on net interest on the public debt despite ultralow interest rates.  Should the Federal Reserve raise interest rates to historical norms (as they no doubt will eventually do), more and more of the tax dollars that are remitted to Washington by working Americans will be spent on debt interest payments rather than entitlement programs.  Ceaseless additions to the total federal debt will have the same effect and will eventually constrain government's ability to fund much needed social programs.  As well, let us not forget the looming $100 trillion shortfall for the aforementioned entitlement programs as noted here.

Fortunately for Mr. Bernanke, he is highly unlikely to ever need to avail himself of Medicare, Medicaid or Social Security.  The same cannot be said for those Americans who live on Main Street.