2008 November 02 Sunday
Current Financial Crisis Small Compared To What's Coming
David M. Walker, former Comptroller General of the U.S., argues that the current financial crisis is small potatoes compared to the coming unfunded entitlements US financial crisis.
At the dawn of the 21st century the U.S. had $5.7 trillion in total debt. As we approach the end of George W. Bush's presidency only eight years later, that sum has nearly doubled, thanks to war costs, tax cuts, spending increases, expanded entitlement programs, and now a welter of government bailouts and rescues.
This year was particularly bad. The federal budget deficit for fiscal 2008 hit $455 billion, up from $162 billion last year. That figure does not include the cost of the Emergency Economic Stabilization Act of 2008, which has an initial pricetag in the hundreds of billions of dollars. In fairness, some of that money presumably will come back to the Treasury, since the new rescue-related sums will be used to acquire preferred stock, mortgages, and other assets that someday could be sold at a profit.
Yet any such calculations are penny ante compared with the fiscal disaster that is bearing down on America.
The US old age entitlements are underfunded.
The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.
Do not plan on retiring at age 65. Here's why:
Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels.
My guess is that the problem is much bigger than Walker expects. Calculations of the size of the unfunded liability are based on assumptions about future economic growth. These assumptions seem excessively optimistic for a couple of reasons. First off, Peak Oil is coming. That's going to cut into per capita GDP and cause the US economy to shrink for several years. Second, the aging of the US population is not the only large demographic crisis we face. Poorly performing Hispanic immigrants will cause declining per capita income in California The economy in Texas will become more like the Third World as well. The lagging groups will not get better with time. So declining per capita GDPs seem inevitable - at least until either artificial intelligence or genetic engineering overwhelm this trend. The libertarian view of immigration is deeply flawed. This means that the leftist welfare state and the libertarian dreams for a smaller government will both take big hits. So will your living standard. Plan and work accordingly.
"excessively pessimistic" in the last paragraph is a typo, right?
It's worth pointing out that there is a difference between liabilities owed to ourselves (which is not a liability so much as a promise to redistribute plus a deadline) and liabilities owed to foreigners. Let's say that 80% of US debt is owed to the recipients of the entitlements. If the entitlements are paid for out of dollar printing, who is hurt? The holders of the debt, ie the beneficiaries of the entitlements. They are effectively going to be paying for their own entitlements out of their savings. The problem almost solves itself.
Yes, bjk, we owe it to ourselves. But we do not each own our proportional share of the national debt. Some of us owe it to others of us. Dollar printing (inflation) will hurt those who own more of the national debt than others. And those dollar reserves held by foreigners are going to be sold off in a hurry when they see what's up, leading to a rapid collapse in the dollar's foreign exchange value.
The overseas debt holders argument is bogus. If you look at the debtholders, it tends to be countries in rapid demographic decline (like Japan), while the debtor countries (like the US and UK) are still growing. Demographically, the US is one of the few places for those Japanese senior citizens to put money. Unless the Japanese want to put their money in Africa (good luck with that) or Europe (also facing democide), they have little choice but to buy US debt and watch it get eaten by dollar depreciation. We live in a world in which able labor is far more scarce than capital.
Here's some happy news (from NRO):
The Financial Report of the United States Government for fiscal year 2004, released just before Christmas, says that the unfunded liability of the Social Security system is $12.5 trillion, an increase of $810 billion over the previous year. However, the Medicare deficit is twice as large: $24.6 trillion, an increase of $9.6 trillion from 2003.
What doesthis mean?It means this - taxes are going up and benefits are going down. The Social Security tax is currently 12.4% and is capped - expect both the tax and the cap to rise steeply. The Medicare tax is uncapped, so the rate will have to be increased. Social Security will become essentially a welfare program for the elderly - anyone with significant additional sources of income will have his or her Social Security benefits taxed away. Medicare will become the new Medicaid for the elderly -payments to doctors will be cut to the point that many will refuse to accept Medicare patients.
Politicians don't like to talk about this stuff - they hate to bring bad news to the voters ("Vote for me! I'll raise your taxes and cut your entitlements!") Look at all the outrageous promises Obama is making, and people are dumb enough to believe it. The unfunded future liabilities for Medicare and Social Security are almost three times the entire national GDP, and nobody cares. Most politicians today know that they won't be in office or maybe even alive when these chickens come home to roost, so what do they care? I find it especially ironic that many young people are so enthusiastic for Obama - they're going to be around long enough to pay the full cost of this folly. The Baby Boomers may make out OK.
If I were running for president my campaign theme would be:
"We're broke, but we don't know it yet because we're bad at math"
Obama has the strength and goodness to overcome the problems that selfish old white men have created. Something about him transcends all the tired old standards of right and wrong, good and evil. He is the one that the world has been expecting, the promised bringer of light and life. Do not be afraid if you do not understand it completely. It is much larger than yourself, and completely new. It will be wonderful.
Say thankyou to China for letting you extend the country's credit card debt:
WASHINGTON (MarketWatch) -- The US government is expected to borrow a record $550 billion in the current quarter, including $260 billion in special funding for the Federal Reserve's extraordinary liquidity programs,
They said the same thing about FDR but then he imposed a highly progressive tax on income in place of a wealth tax and had Huey Long, the only contender for his position advocating a genuine wealth tax, assassinated.
Obama has teamed up with the richest man in America, Warren Buffet, to once again talk about a progressive income tax as if it were a wealth tax. Guys like Buffet will thereby continue to suppress the income of those who haven't already made it to his estate while enjoying the blood and guts of kids defending his property rights under Obama's "National Service". Ultimately, of course, this is an African "Big Man" game -- centralize the wealth and women.
We don't have to worry about the debt. The current system will collapse around 2050 when longevity drugs hit. We will need to rethink everything in our society, It is going to be a nessy, probably bloody time but eventually something will come out of it. I fortnately, or not (depend9ng on ones point of view) will not be around to see what happens. Dan
Dan, I might just make it. I'd be kind of pissed off if I'm part of the last generation that wasn't potentially immortal. Even if things initially go to hell, I agree with you that it'll ultimately work itself out after which things should be pretty cool.
No, you are missing out the important intergenerational transfers. If you are in your 30s or 40s you are getting the shaft from the people in their 60s and 70s and 80s and by those who have already died.
When the cutbacks in entitlements come for those in their old age those who suffer the cutbacks will be those who paid the most in their working lives. I expect Social Security taxes on my income will go up much higher and then my future benefits will get cut. Someone who is 60 now will retire on time. But someone who is 50 will have to retire much later than current benefits law currently states. The 2010s will features lots of excrement hitting air circulation devices.
Yes, the dollar's buying power will have to drop in order to balance and reverse the US trade deficit. Lots of interest on US debt flowing to foreigners will further depress the dollar's value.
The Chinese are not doing us any favors by buying that debt. They are doing it to keep their exports flowing out of their country and into ours. We'd be better off if they didn't buy it.
Warren Buffett pays very little tax on his long term capital holdings. He'd rather tax income because he didn't turn his holdings into income. I have a better idea: Tax holdings. Then see what his reaction is. Bet he suddenly becomes a fan of smaller government.
Humans are getting stupider just as longevity drugs are being developed! Just in time for immortal idiots! Ever see the movie Idiocracy? Or read the science fiction tale Marching Morons? On schedule.
I have a better idea: Tax holdings.
Even more interesting would be what he would do if all taxes on economic activity were _replaced_ with that tax on holdings.
Hasn't enough capital already fled the US? Don't we have enough socialism already?
Bob, why do you think it is less socialist to tax economic activity than holdings?
In a word: ownership.
Suppose I own a lump of gold. It is mine. My property rights say I can do with it as I please.
A wealth tax says my property rights have a half-life. As the government taxes my lump of gold, I have less and less of it. Eventually, I will only have half of it. And then half of that. A wealth tax says I don't really own that lump of gold at all.
Even capital gains taxes are inherently socialist. Same lump of gold. With a capital gains tax, every time the government prints more money my lump of gold has a higher price in money, and the government takes a piece of my gold. Once again, my property rights have a half-life.
Many of the things taxes pay for make economic activity more lucrative. I take my lump of gold, and I drive down the road paid for by taxes. I am protected by the police paid for by taxes. I put up my lump of gold as collateral for some money thereby entering into a contract protected and enforced by the courts paid for by taxes. I take that money and enter into other contracts. I pay for air fare. I travel to clients and make lots more money where my safety is paid for by taxes. I pay off the loan and get to keep my gold. Plus I have this extra money I would never have had except for taxes.
Taxes are just a part of the cost of increasing my wealth. Without taxes, I would have to pay for security guards to keep me safe. My travel would be difficult and expensive. Risk would severely limit my opportunities for trade.
You are missing my "Bet he suddenly becomes a fan of smaller government.". Taxes on holdings would align the interests of billionaires more closely with our own. Buffett can be cavalier about the size of big government because he doesn't pay for it. I want the billionaires to take a really keen interest in shrinking the size of government.
Regards 2050: I'm really worried about the 2010s, 2020s, and 2030s. We all eat in the short run. Utopia in 2050 doesn't do me a whole lot of good for the next 40 years.
Suppose I own a lump of gold. It is mine. My property rights say I can do with it as I please. A wealth tax says my property rights have a half-life.
How long would you retain control of your lump of gold without the government to uphold your property rights?
Just stop a moment and think.
All those other "services" like "roads" etc. you think are the proper province of government, and somehow justify its taxing your activities, are far better handled by private concerns.
It is taxes on activity that are socialist -- not charging a fee for upholding property rights.
are far better handled by private concerns.
I didn't miss your point. I think socialism is a heavy price to pay just to coerce one billionaire.
> How long would you retain control of your lump of gold without the government to uphold your property rights?
I guess much longer than when the government does "uphold" my property rights by routinely stealing half of my income. At least I have a gun and can ward off a garden-variety thief. I cannot refuse to pay taxes - I'm hopelessly outgunned by the government thugs.