Balanced budget on track for June 2008

The Monthly Treasury Statement for January came out yesterday, and the trends are slightly better than the previous month’s.  Here is the usual chart, showing when tax receipts will surpass spending if the trends hold (May-June 2008).  Click to enlarge.

In each of the last six months, I've received quite a bit of feedback on this chart.  So far, however, my favorite is from Mr. Mark Kleiman on January 17, 2007, in his blog.  He put his analysis in a post under the heading "Lying in politics."  His expert technical description of the chart described it as "some sort of linear extrapolation from noisy revenue data."  His conclusion: "[I]t's complete garbage."  Reason this is my favorite feedback: It tells me far more about Mr. Kleiman than it does about the chart.  [Update: The list of people who don't understand what this chart is telling them is growing by the day.  See this post by "PGL" at the Angry Bear blog.]

Mr. Kleiman and I now have a $1000 bet in play: If the lines cross on or before December 2009, I win; if not, he wins.  The bet is nullified if a significant change is legislated for the capital gains or income tax rate structure before the bet is decided. 

Although I still dislike the idea of balancing the budget, and will continue fighting deficit phobia with all the logical tools I have available, winning the bet would make a balanced budget mildly less painful for me.  To win, all I need is for the trends to continue approximately as is for the next sixteen months.  What my opponent needs is some kind of major shock, like a terrorist attack, recession, hurricane, tsunami, earthquake, etc.  I like my side better; having to hope for bad news is not my preference.  I'll leave that to the political hacks. 

By the way, both sides of the bet are now in the hands of a neutral third party, invested in short-term government bonds—i.e., invested in a piece of the national debt.  If I win, I will bequeath that piece of the national debt to my granddaughter.  Remember, our grandchildren will inherit the national debt; I'm just trying to do my share to further the cause. 

Comments

[ilsm]

Aaron,

"In fact, programs like the F-22 are not only to fight the Russians, but more likely the Chinese or countries that might buy the advanced Eurofighter."

I think it would be much cheaper to buy all the Eurofighters ourselves, or preempt them with the A-10's we now have.

The reason we do not is that your scenario is quite far fetched. But it does sell airplanes.

Crazy, huh?

That range of thinking goes back to the 1880's here, much ealrier in Europe.

Alfred Thayer Mahan said it would be extremely stingie (I refrain from his actual word) for a rich country like the US not to have battleships to keep the Royal Navy from bombarding New York or Boston.

Forget coastal forts, not sexy.

Anyway, it is not likely the Chinese will attack us; they hold the mortgage, much like the British in the 1880's.

Last idea, consider this: do you think the F-22 works?

I see you think it is needed, but how much is it needed?

Can you put a dollar or time requirement when it has to be done and how much it can cost?

Is there any idea of the military that should have a cost limit?

Is it all so necessary that any cost, any delay and any missed performance is okay?

[ilsm]

Andy, et. al.,

"It kinda seems like we're not getting anywhere with this."

It has been a good conversation.

I have heard a couple of common myths: that we have a technology base, and related that we get good things like GPS from the trillions.

That we have serious dangers from enemies who will fight us the way we expect is the most serious myth here.

But, it has been interesting and unless you all really want to continue I think we have assured my knowledge of the current myths that are actually bases for moral hazards of too much money spent for love of defense toys.

And profits too.

[Jon Thompson]

"Come on!! What is different about blowing things up and killing people whether you are a guerilla doing it where you see the gore or pushing a button in a missile silo."

Well, the amount of damage done to America. Seriously, I'm not clear on what alternative you are proposing, if any, but if we had no defense department, what stops a country with nuclear weapons from bombing us? Why can't a country roll tanks down our streets, destroy our bridges, etc.? I see no moral distinction between fighting a guerilla war and launching missiles, all other things equal, but I would prefer not to fight a guerilla war on American soil when I could, instead, bomb somebody else.

Anyway, your argument seem to boil down to this: Our defense spending (whose purpose, on the defense side, is to deter rational enemies from attacking us with traditional industrial warfare methods) is not needed because no rational enemy is attacking us with traditional industrial warfare methods. Is that correct?

I think for that to work you have to argue one of the following:

1. That it is not a good investment because guerilla warfare/a rapidly created force would be remarkably effective.

2. That no one will ever want to go to war with us.

3. That no one will ever want to go to war with us using the traditional industrial warfare methods.

As to #1, I'm really unable to see how, if China were to set a tank rolling down my street, I'd do a thing about it. If Russia threatened to bomb us if we didn't send over regular cash payments. So on, so forth.

As to #2, this is one of the better points. With a more isolationist world view, few rational enemies would have much interest in us, based on the world today. However, it is possible that a lot of that has to do with the fact that a rational enemy must realize we have overwhelming force today.

For #3, I think this is simply ridiculous. Clearly, China is interested in at the bare minimum posturing towards a fairly traditional tanks and bombs war with Taiwan, despite the enormous economic costs this would have on China (Taiwan is a huge trading partner).

Anyway, you really seem to be arguing that because no one in the world has a strong interest in invading/extorting/annexing America today, that will be the case in the future, and would still be the case if we dropped defense funding.

However, I'd argue that one of the main reasons we have defense is to deter those impulses, so the lack of desire on the part of other countries may be in part a response to our defense spending, and removing it would create that impulse/allow it to be unleashed.

A point on research spending: I've recently been looking at the efficacy of government research from OECD data, and what I've tended to find is that the only research spending that has a positive effect on growth is military, and it is also the only one that doesn't crowd out private spending. I won't argue particulars, but that's the way my preliminary research points.

Finally, you seem to also be saying we aren't on board with the next revolution in warfighting. If true, then I suggest that we should invest in it, whatever the hell it is.

[Jon Thompson]

ilsm,

Also, this just got me. What about piracy and transnational raiding? Not a serious threat today in most of the world, but, again, I'd say at least part of that is because rational people realize that type of activity leads to death.

Finally (honest, this time), I can see the defense department being about a love of toys, patronage, pork, and occasionally even support of a few giants (like Boeing). But, profits as a long term motive? That just makes you sound like, well, Butler. Even if the whole defense department budget for this year is approved, and the whole thing were for physical outlays to private corporations, and the maximum allowed profit were to be had, you'd be looking at less than $20 billion in black ink. Putting in more realistic numbers gives something closer to a tenth of that. Saying that's the motive for the defense department is like saying the second world war was about grabbing German patents. The motive is so silly given the scope of the activity that it makes you sound like hating business is the only thing you care about.

[Andy]

Ilsm,

When you say "love for toys", it gives me the impression that you still only equate defense spending with heavy machinery and other such infrastructure. While I don't deny that those are part of the idea (and Jon Thompson above has very good, concise arguments to support them), it's very important that you also include funding for our intelligence community in that definition. Beefing THAT up is what increases our chances to not only prevent terrorist attacks but also generally make us safer.

As far as your skepticism towards military tech research, Jon Thompson also provides a good argument. I can't add much except to recommend recording the 3-part Discovery Channel series "2057". Many of the scientific advances they cover involve military research going on today. Plus, it's just an all-around cool show.

[ilsm]

Jon,

Google Sun Tzu. There are about 300 couplet to disolve. An hour or so.

No one is building to a second generation war (industrial age) other than the US and a small amount of the EU.

If China gets the tank here I know what the Hungarians did to tanks in Budapest in 1956.

Yes, I argue we are investing in the wrong stuff.

As to investment value of military R&D there are 6 kinds, the basic stuff is pennies and what you are probably talking about. The big R&D expenditures is funding stuff to design the F-22 and MV 22 are nearly pure waste.

No new tech on these except a very expensive marginal increase in engine power at huge cost and no reliability.

What good is stealth skin to the airlines especially when it goes wacky in the rain and is the reason the B-2 is grounded 60&% of the time.

The idea that we have a technological advantage is a myth. The idea we have any return on our R&D is a myth.

[ilsm]

Jon,

I thought we were done, too.

"$20 billion in black ink."

That is good profit on no investment, except for working capital. The DoD pays all, I mean even manufacturing tech development R&D. There is no venture capital. The plants are generally old arsenal space or leased at cost.

Here are some observations: 30% of the $480B requested for 2008 is for mil personnel. The remaining 70% is for operations and maintenance of equipment and investments which is R&D and production.

Now R&D is close to $70B next year, most for designing marginally improved stuff. No new technology, basically productizing stuff.

Generally done cost plus, the A-12 was last fixed development and the Navy and Boeing are still fighting over the @2B in 1998 money paid and owed back, no risk at 10% profit. Great for no risk and almost no capital except cash.

Production is close to $90B next year, here the industry can do fixed price and could get over 10%.

No one does not make money ever working for uncle sam!

Then $90B for O&M is mostly a cost plus. So maybe $9B profit there for working capital investment.

Great profits for no risks and no real capital.

I thought we were done.

[ilsm]

Andy,

My skepticism is based on direct and current observation.
See the above, Jon's "position is suppostion and no knowledge.

INTELL, we spend some there but the big bucks are where I said above.

No time for TV.

Do you believe evr=erything on TV?

Everything I have ever seen on the tube which I have had first hand knoledge of they got wrong.

[ilsm]

Jon,

This just got to me:

"That just makes you sound like, well, Butler."

If that was meant as compliment thanks.

Butler is a deceased US Marine who was awarded The Medal of Honor for combat.

If meant as smear you just swiftboated a deceased Marine who earned the CMH.

[Jon Thompson]

"Google Sun Tzu. There are about 300 couplet to disolve. An hour or so."

If you had a point beyond implying the idea that you are knowledgeable and I am ignorant, you would have made it.

"No one is building to a second generation war (industrial age) other than the US and a small amount of the EU."

China, Japan, India, Pakistan, Brazil.

"If China gets the tank here I know what the Hungarians did to tanks in Budapest in 1956."

Maybe you could fight. Hell, maybe most Americans could and I'm just a pansy. I don't see how that changes the fact that the vast majority of damage would be done against us, or what we could do without nuclear threat as a counter threat if threatened by nuclear weapons.

"Yes, I argue we are investing in the wrong stuff."

And do you have an alternative investment strategy, strategy overall, line of thinking, or are you just a nihilistic coward incapable of doing anything but attacking others who have the courage to believe in something?

"As to investment value of military R&D there are 6 kinds, the basic stuff is pennies and what you are probably talking about. The big R&D expenditures is funding stuff to design the F-22 and MV 22 are nearly pure waste."

Frankly, I'm not interested in this debate. You think there is waste, but there is some kind of stuff that is good; fine, argue that. Arguing against the whole theory of having a DoD on the grounds of inefficiency is stupid.

In any case, I don't care about your anecdotal experiences. Several hundred years ago, people who like to think about problems thought up something called the scientific method. When applied to issues of statistical and scientific evidence, it states that anecdotal, personal experience should be discounted unless it disproves the scientific or statistical evidence. The evidence exists to show that defense R&D is beneficial to the economy. Your anecdotal evidence supplied to the contrary proves nothing more than being able to show a smoker who didn't get lung cancer proves that smoking is safe.

"The idea that we have a technological advantage is a myth."

That is simply patently false. A study of America's productivity rates shows America has an advantage over every country on Earth but Luxemburg.

"(argument about profit rate)"

Not surprisingly, you failed to get my point. The idea that the defense department exists to profit weapon manufacturers isn't foolish because they don't profit. It is foolish because of the disparity between the motive and the action. If I want to kill a man, I'd be an odd duck if I chose to do it by blowing up a theater full of people to get to him.

"If meant as smear you just swiftboated a deceased Marine who earned the CMH."

I know who Butler was. If you had read my earlier comments, rather than spending all of your time crafting snide (if occasionally unintelligible) remarks, you would realize I mentioned knowledge of him after your first post.

Butler may have been militarily successful. However, he was also a mindlessly anti-capitalist, anti-business moron who didn't understand his role in the world, and overestimated his status and importance.

When approached by a few businessman about a possible overthrow of the Roosevelt administration, Butler blew the whole thing up and pretended everyone he didn't like in the world was involved. Then, when it came to light that a few people had approached him, but he was unable to prove the existence of a vast and incipent conspiracy, he saw what else but a conspiracy (all proof of conspiracy is such, and all proof against is also proof of said conspiracy, as only a conspiracy could contain proof of a conspiracy).

In any case, I'm a bit confused. If Butler is to be believed, his military actions were genuinely evil. If that's the case, does he deserve a hero's treatment?

[ilsm]

I have been here to understand.

What I have learned is: there are those who would borrow for huge waste under the illusion it is good for something.

I won't change your mind.

But you have made me aware.

It is far better to seek to understand than be understood.

That poor man made that statement in 1200 something.

[Aaron]

Ilsm,

Please google A-10 and get back to me...

If your plan is to buy all of the Eurofighters...GREAT! Oh, but what if the Europeans disagree with you?

p.s. Ask yourself why we couldn't simply buy every MIG the Soviets made or every Messerschmit the Germans made, or every rifle the Redcoats fielded.

[Andy]

"What I have learned is: there are those who would borrow for huge waste under the illusion it is good for something."

Ilsm,

1) Yes, there are those of us who would borrow for good investments.
2) Most of us think defense is a good investment.
3) Most of us are aware of certain wastefulness in defense spending, as well as in many other areas of the budget.
4) Most of us would like the wastefulness to be identified and eradicated so that the money we put into defense can indeed be considered a 100% good, wealth-protecting investment.

However...

I am unclear as to how much of the defense budget you consider to be wasteful. If you think it's 100%, then I believe even your best friend would have a hard time getting through to you. But if you think it's less than 100% - let's say 90% wasteful - then why not promote the identification and eradication of that 90% and concede that the other 10% are good, wealth-protecting investments?

Please identify the parts of the defense budget which you do NOT consider to be wasteful.

[ilsm]

Andy,

I do not see any part of defense that cannot be made "lean".

Jack Welch would cut with a chain saw.

Inventory: too much stuff. Formations exist because of profit needs of the industry.

Over Processing: Over specified, expensive junk. Too much spec for the real world. Gold plated. Good for the profits.

Defects delivered. Be very happy the stuff is not needed. The industry delivers defects because they get paid to do things over and fixing defects is business development.

Those are just a few of the systemic defects and they are all over the place.

So, I would spend about $140B in FY 08. That is less than 25%, the place has 75% waste.

Budget: Mil Pers $65B, O&M for current readiness: $55B, $20B for investment in the defective garbage.

My issue is waste!!

One example, the USMC Expeditionary Fighting Vehicle, a super amtrack. The Corps has spent $1.2B so far and is needing to walk away from the failure.

See a Wash Post article pg. D3, 17 Feb 2007.

There are all kinds of other examples. Cut the waste, it makes the mirage of buying security less real.

[Charlie]

Man, this looks like a really bad bet now, doesn't it? I think it was a pretty terrible bet then too. All you had to do was check cbo. What do you put your chances of winning at now?

It's interesting that you are reading Taleb's books. I wonder what he would have said if he saw someone extrapolating long-term trends from 12 monthly data points.