As of this article’s publication, Washington pols are completing a debt ceiling deal. The fluid negotiations suggest that Pres. Obama will get a debt ceiling extension that will last beyond his reelection bid, Sen. Reid and Rep. Boehner will abdicate their budgetary responsibilities to a faceless committee, and the Tea Party will not have to swallow very many tax increases. Everyone wins, except there are no real spending cuts or plans to keep the US Government solvent for more than perhaps a decade. The US is racking up a frightening debt load, but how much spending must really be cut to prevent the collapse of the US Government?

As Shout Bits mentioned, Federal revenue has returned to nearly its pre-recession levels, only about $100bln short of its all-time high. The $1.5 trillion deficit problem is caused by the fact that Federal spending kept climbing at its normal pace while tax revenues took a three year break. There is no solution to the US Government’s crisis that does not rely on increased economic growth, and that must involve the rich.

Contrary to  Obama’s demagoguery, the US tax system is highly progressive, meaning that the fate of the rich is the fate of the Federal Government. The poor’s income taxes have never been lower in modern times. Tax receipts as a percent of the economy rise and fall with economic growth, but the government’s take has fallen to a level not seen since the 1950′s. Considering the myriad services such as Medicare that have been added since then, tax revenues must return to their historic highs to fund taxpayer expectations. Because the top earners pay most of the taxes, the US needs a resurgence of the rich. The rich need to invest and employ so they can become richer and pay more taxes.

Of course there is no guarantee of such a windfall given oppressive new laws such as Obamacare that are stifling the economy. Still, if tax receipts returned to about 18% of GDP, the Bush era peak, tax revenues would increase by $450bln. Considering that is more than twice the illusory savings from the latest debt talks, Washington’s top priority should be a restoration of the US economy. If tax revenues returned and the economy grew at a rate of 3.5% for a decade, tax revenues would further grow by an average of $460bln per year. The US’s history suggests that when government oppression is relaxed, such prosperity is possible, and often exceeded. Still, that leaves $590bln annually to be cut to balance the budget over a decade, less than half of the current plan.

The US spends $159bln per year on the Iraq and Afghanistan wars, so assuming they end soon, the magic number could fall to $431bln, about the deficit Pres. Bush was running as he left office. It is not curious that bad economic policy amounts to the bulk of Obama’s woes.

As Shout Bits mentioned, wasteful spending and Washington corruption account for a small part of the required cuts – perhaps $90bln. With Sen. Reid defending cowboy poetry, and Rep. Pelosi disallowing any cuts whatsoever, eliminating entire departments such as the DOE and DOC seems impractical. Even assuming the elimination of entire wasteful departments and general bureaucratic belt tightening, the budget must be cut by $330bln per year while capping Social Security and Medicare.

There is no way past substantial military cuts. There is no way past increasing the eligibility ages of Medicare and Social Security. There is no way past cutting welfare entitlements. As every libertarian and realistic conservative has been harping for years, the US must redefine the Federal Government’s role to be a much smaller part of everyday life. The US Government cannot solve every problem, and everyone cannot have everything – a tide change in the Washington paradigm.

The prescription of $330bln in annual cuts to basic government services is more than enough to bring Greek style riots to the streets. Such tough cuts could dissolve the union separating states with economic growth from those that have been declining. Still, these cuts will happen; the only question is whether the US will choose them or they will be imposed when the wolf is at the door. Tea Party voters know this, even if intuitively, and they are unlikely to back down.

As the federal debt climbs toward an ill-defined event horizon where the dollar crashes and basic services are shut down, voters face a cacophony of conflicting and scary predictions. Pres. Obama has threatened to withhold Social Security checks, as if Social Security is the lowest priority for the $4.1 trillion in revenues Washington hopes to receive this year. Washington is expected to burn through $1.4 trillion more than it collects this year, which is clearly a disaster. Still, should Obama take the entire blame?

To state the obvious, the deficit is the difference between federal revenues and outlays. Contrary to Pres. Obama’s carping about millionaire jet setters, the revenue side of this equation has resolved itself. Tax revenues peaked under Pres. Bush at $4.2 trillion ($450 bln deficit that year), but they have already recovered to $4.1 trillion. Falling revenues caused close to half of the deficit in 2009 and 2010, but they are no longer a problem.

What about Obama’s wasteful stimulus programs? Between the recovery stimulus, the housing stimuli, the auto bailouts, and the Fannie / Freddy bailouts, Obama has wasted well over $1 trillion. Still, that money is spread out over at least three years, and is mostly behind us. It cannot account for this year’s $1.4 trillion deficit.

Federal spending has been on autopilot for some time, and Obama’s spending increases are nothing extraordinary.

Federal Spending 2000 – 2011

source: Wolfram Alpha

The chart shows the impact of Obama’s stimulus, but spending has since returned to its historical growth rate. Likewise, the promised spending cuts negotiated the last time Obama and Congress butted heads are nowhere to be found.

The reality of the US’s budget problem is that the Federal Government is a beast with no master. Obama and Congress are only servants to an economic and political force that wants to grow. Most Congressmen owe their careers to some part of the federal beast, and no majority can form to pass even the smallest reforms. While Rep. Pelosi’s recent call for no cuts whatsoever sounds radical, that is basically the sentiment of every Congress for the past 90 years.

Obama’s calls for millionaires (read those who earn $150K) to pay their fair share are of course bogus, but so are Herman Cain’s calls to ‘cut the fat.’ Reforming obvious government waste cannot close a $1.4 trillion gap. Eliminating the Departments of Education, Commerce, Interior, Labor, NSF, Community Service, SBA, and Energy would only save $90 bln.

The debt limit impasse presents two stark and unpleasant choices: 1. The US can become a European socialist state with its current level of government services, but with high taxes, low growth, and a permanent underclass of the unemployed; or 2. The US must seriously rethink its big ticket programs: Welfare ($571 bln) , Social Security ($695 bln), Medicare ($453 bln), and Medicaid ($290 bln), and the military ($695 bln). To listen to Washington, simply freezing these budget items would bring about the apocalypse. Even if the budget were held to inflation it would take 21 years at the current GDP growth rate of 1.5% to balance the budget.

Is Obama to blame for this mess? No, but like all Washington insiders, he is opposed to any real solution. False compromises of tax increases and fantastical far off budget cuts cannot solve the US’s serious troubles. Real solutions like a balanced budget amendment, or simply letting the US hit its debt ceiling sound radical, but every moderate method has already failed. Beltway thinking is the road to disaster, which is something to remember when a GOP moderate asks for your vote.