Shrinking Flint Michigan will pull in toward a city core in order to cut costs.
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.
Concentrating cities in a smaller area reduces the costs of trash collection, street maintenance, police patrols, and other city services. Flint's economy has been in decline for decades. It needs to shrink to survive.
Detroit is in a similar situation.
In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
What some poor Michigan cities are going thru foreshadows what the country as a whole will go thru as Peak Oil hits. The economy will contract much more than it is contracting right now. The costs of road maintenance, trash collection, and other local government services will soar along with the costs of asphalt and vehicle fuel. Already Michigan counties are converting some roads from asphalt to gravel in order to save money.
The economy's decline is creating a crisis atmosphere where extreme options become thinkable.
State income-tax revenue fell 26% in the first four months of 2009 compared to the same period last year, according to a survey of states by the nonprofit Nelson A. Rockefeller Institute of Government.
The revenue decline could become even more severe as the year wears on.
Absent drastic spending cuts the state government of California will run out of money in late July 2009.
Senate President Pro Tem Darrell Steinberg pushed for raiding much of the state's proposed $4.5 billion budget reserve next year to bankroll key health, welfare and college aid programs.
"The purpose of a rainy-day fund is to provide funds for a rainy day," he said. "It's thunder and lightning in California right now."
A budget reserve is for worsening conditions and unforeseen problems. The economy could easily contract even further and and further reduce the state's tax revenues.
The editors of the Fresno Bee say partial solutions got us into this mess.
Gov. Arnold Schwarzenegger is correct to insist that the Legislature solve the entire state budget problem of $24.3 billion, and not come up with partial solutions, with the hope that tax revenues will increase as the economy improves. Partial solutions have brought California budget misery that now threatens every state program, including the safety net for our poorest residents.
Karen Bass doesn't want a $24 billion dollar hole in a $92 billion budget to lead to big spending cuts. To do what is necessary is a misuse of the situation.
Assembly Speaker Karen Bass also explained that “[t]he bottom line for Assembly Democrats is that we are committed to ensuring that the state's fiscal emergency isn't allowed to be misused to eliminate the safety net in California or to eviscerate our public education system."
Misused? A budget deficit shouldn't be "misused" to cut spending? How should a budget deficit be used? To increase spending? There's an Alice In Wonderland aspect to the California state legislature. The state is in its biggest fiscal crisis since the Great Depression and the Democrats are in denial that they have to make big cuts in spending programs.
Clue for Karen Bass: When you have less to spend you have to spend less. Admit it. Accept it. Make peace with it. The state government doesn't have the money that a welfare state requires. Don't dig the hole deeper. You are just delaying the inevitable and making the inevitable cuts deeper when they come.
I wonder of the Democrats in Sacramento need for the state to totally run out of money in order to let them justify to their supporters that government employees must get pay and benefits cuts and that many welfare programs must be slashed and eliminated. Do they need a fully developed state crisis to force them to make drastic cuts?
Lockyer was invited by Assembly Speaker Karen Bass (D-Los Angeles) to explain the fiscal facts of life to house Democrats during a five-hour caucus Monday. These mostly-liberal lawmakers soon will be asked to cut spending as they'd never dreamed in their worst nightmares.
"I began with, 'Why don't you start with the realization that probably none of you are going to be back here next year?' " after the November elections, Lockyer recalls.
"That's a very liberating thought, and with it you can get a lot done."
Imagine that none of the people in the legislature were even eligible to run again. Would they finally vote to balance the budget?
Arnold Schwarzenegger wants to terminate some spending programs. Schwarzenegger calls on the legislature to put the citizens ahead of the interests of employees of the government and unions.
In the wide-ranging interview, Schwarzenegger challenged legislative Democrats to resist the influence of special interests fighting the deep program cuts he has proposed to help balance the budget.
Clearly alluding to labor unions that oppose the cuts, the governor said: "Do they want to protect the workers that provide the services, or do they want to protect the people that get those services? The choice is up to them."
But Arnie's in some denial of his own over Hispanic immigration.
SACRAMENTO — Gov. Arnold Schwarzenegger on Friday disputed claims that illegal immigrants caused California's $24.3 billion deficit, while he praised their economic contributions and said he is "happy" they have access to services.
Reality check: Imagine America's southern border was closed to immigration 30 years ago. Imagine illegals were rounded up and deported. California would have many millions fewer lower skilled and lower earning Hispanics. Also, millions of higher earning whites would not have fled the state for a better life elsewhere. So the state would face less demand for medical, prison, and other services for poor Hispanics and more tax revenue per higher earning citizen. The state would be in better shape to the tune of billions of dollars per year.
The illegals alone cost several billion per year. The descendants of previous generations of illegals cost far more.
He said the cost of services to illegal immigrants, which has been estimated at $4 billion to $5 billion annually, is a "small percentage" of the deficit California faces.
Update: BTW, a factor rarely considered in discussions of immigration is the fiscal effects of population growth. When a population grows the number of roads, schools, police stations, court houses, jails, fire stations, sewage treatment plants, and other physical plant must all increase. Those costs end up getting paid much more by the existing population than by the new population since all are taxed to pay for the needed additional assets. Since the immigrants have much lower productivity and earning power than the natives the natives pay an even larger amount to fund the needed infrastructure.
California's rapid population growth due to immigration is a major reason why it is in a fiscal crisis. Lower income immigrants have come in while higher income natives have left. This trend looks set to continue in the future. The remaining white population will shrink while the lower earning Hispanic population grows. We will see both higher taxes and lower quality of public services as a result. The California dream is dead.
To close the California budget gap, funds for education will now have to be slashed by $5.3 billion, and $2.8 billion will be cut from health and social programs, the governor said. Mr. Schwarzenegger also said the state would move about 19,000 illegal immigrants to federal facilities and transfer more than 23,000 nonviolent offenders to local jails to cut costs.
Regards the illegal alien criminals: This budget crisis creates a bigger incentive for states to identify illegal aliens amount those in prison. Sounds like any prisoner who is an illegal alien can be turned over to the federal government. So why aren't states already trying harder to identify illegal alien criminals? This would lead to their eventual deportation. Much better for us in the long run.
It takes a huge multi-year budget crisis with a $21 billion dollar budget gap to get the state of California to shift non-violent prisoners from expensive (read: staffed by high priced labor) state prisons to cheaper local jails. This is why I'm not sympathetic to the state government. It makes me wonder what else the government resists cutting that does not change quality of service delivered to the citizens of the state.
Back when Shwarzenegger's predecessor Gray Davis was in office Davis made a deal with the state prison guard union to give them large wage increases in exchange for big campaign donations. This is a major reason why those local jails cost less to run than the state prisons.
I think a severe fiscal crisis (and hopefully bankruptcy) in California will basically cut down on the amount of parasitism that has built up in the system. Nothing less than a severe crisis will shake loose well entrenched parasites.
Consider the University of California's bloated administration.
Sen. Jeff Denham, R-Merced, pointed to the University of California's administration as ripe for spending cuts.
"Does the UC president's office need 1,000 employees or can he do it with 500?" Denham asked. "Do we need to have presidents and chancellors that are making $400,000 plus per year?"
I'm thinking the UC president could run the UC with far fewer people. I'm also thinking the cost of instruction could be lowered with lots more video recording of lectures and web-based delivery of tests. Cut labor costs more more automation of education.
A San Jose State University political science professor is eager to fix the state's financial problems with lots of new taxes.But he's facing big state university cuts. I say video record lectures of political science professors and employ fewer of them to deliver lectures.
A small upper income elite pays a large fraction of all government costs in California.
The top 1 percent of the richest taxpayers typically pay about half of all personal income taxes in California. More than 55 percent of the state revenue last year came from personal income taxes, followed by the sales tax with 27 percent.
As long as times are good, this arrangement works because as people splurge on big-ticket items and make profits, they send large infusions of tax revenue to the state. But when the economy takes a tumble and people tighten their belts and corporations’ profits fall, the state’s primary source of revenue takes a precipitous drop.
“California is unique in that it so dependent on such a small portion of the population,” said Mark Baldassare, president of the Public Policy Institute of California, a nonprofit in San Francisco that does independent research on the state’s economic, social and political issues.
Low skilled immigrants - both legal and illegal - pay little in taxes because they have little earning power. If we deported them and greatly raised the standards for legal immigrants we could get far fewer but higher earning immigrants. This would both lower the cost of government and increase revenue available to fund government.
There'll be less financial aid for college.
Also potentially on the chopping block is CalGrants, a financial assistance program that offers cash grants to lower- and middle-income college students each year. The governor's proposal would eliminate the 77,000 in new grants awarded each year at a cost of $180 million, but that saving would eventually grow to more than $900 million as students graduate and the program is phased out.
A cut in the buying power of students will reduce prices of tuition at private colleges. Rather than spend $900 million per year in grants to students why not spend a much smaller sum to record college course lectures and shift more courses onto the web? Cut costs rather than fund inefficiency. That's the way it goes in private industry.
Mike Shedlock points to the truly amazing California State Controller John Chiang's May 2009 California Budget Summary Analysis (PDF).
The State’s revenues continued to deteriorate in April. Total General Fund revenues were down $1.89 billion (-16%) from the latest estimates found in the 2009-10 Budget Act.
Personal income taxes were $1.06 billion below the estimate (-12.6%), corporate taxes were below the estimate by $831 million (-35.6%) and sales taxes lagged the estimate by $108 million (-19.9%).
Some of April’s sales tax receipts were pushed into early May, but declining taxable transactions still drove sales tax receipts well below the Budget Act projection. While California’s sales tax rate went up April 1, revenues from the new rate will not be seen until May.
Compared to April 2008, General Fund revenue in April 2009 was down $6.3 billion (-39%). The total for the three largest taxes was below 2008 levels by $6.3 billion (-40.3%). Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%). Corporate taxes were $142 million below (-8.6%) April of 2008
How can sales tax revenue cut in half? Granted, car sales are down by almost that much. But cars are an extreme case. Could be due to the fact that not all goods are taxed. People are still paying for untaxed food. But they aren't buying the taxed goods and services that are more optional.
Cal state spending explodes during good times and then the party ends.
For example, during the dot-com bubble, government spending grew 28% over two years. That growth was ultimately unsustainable, and we didn't have the foresight to save for the recession that followed. During recessions, revenues drop just as the needs for services grow.
How is California's state government managing to function? Simple enough: federal aid has become the biggest source of revenue for the states.
The sales tax had been the No. 1 source of state and local revenue since the mid-1970s, according to the Bureau of Economic Analysis. Before that, property taxes were the primary source. That changed in the first three months of 2009.
Federal grants — early stimulus money plus conventional federal aid — soared 15% in the first quarter to a seasonally adjusted annual rate of $437 billion, eclipsing sales taxes, which fell 2%.
Wages are declining for those who still have jobs. So that cuts spending and tax revenue as well.
If, since 1990, state spending increases had been held to the inflation rate plus population growth, the state would have a $15 billion surplus instead of a $42 billion budget deficit, which is larger than the budgets of all but 10 states. Since 1990, the number of state employees has increased by more than a third. In Schwarzenegger's less than six years as governor, per capita government spending, adjusted for inflation, has increased nearly 20 percent.
The needs and demands of California's expanding poor NAM (Non-Asian Minorities) population explain part of the increased expenditures. But I've yet to come across a good analysis of what has caused California's biggest spending increases.
Defeat of the measures on the May 19 ballot would chop nearly $6 billion in expected revenue from next year's budget, on top of a projected $8 billion deficit left by shrinking tax collections. Proposals by Gov. Arnold Schwarzenegger and others to close that gap are driving a wildfire of criticism across the state.
Those state ballot budget measures are polling very poorly. So another Cal state budget crisis is less than 2 weeks away. I hope the Obama Administration does not offer loan guarantees when the credit market locks the state out of borrowing more money. It is time for the state legislature to act responsibly and do huge restructurings to cut long term costs.
The Obama Administration is interceding in ways that make the situation in California even worse. Barack Obama is trying to block cuts in wages for unionized state workers
Guess what the Obama Administration is doing? It is telling Governor Arnold Schwarzenegger that it will revoke nearly $7 billion in federal stimulus money unless the state restores legislated wage cuts for unionized health-care workers.
Obama's loyalty is toward the public sector and the unions. He also wants an immigration amnesty that will legalize illegals and make them eligible for more social programs. Plus, the amnesty will only accelerate illegal migration and he'll probably push for more legal immigration. Obama makes California's long term problems worse.
A lot of people on the political right are complaining because Obama's trying to promote his image as fiscally responsible by making a $17 billion budget cut. Obama's telling reporters to report the cut as "substantial". But I see another angle here that commentators seem to have missed: Obama's reporting the cut as a way to fund more spending on other government programs.
While the $17 billion in projected savings represents a small portion of the proposed budget, Mr. Obama insisted that “that’s a lot of money, even by Washington standards.” It was enough to pay for a $2,500 tuition tax credit for millions of students, for larger Pell education grants, he said, “with enough money left over to pay for everything we do to protect the National Parks.”
Shannon Love tries to make the scale of the cut more understandable by lopping off zeroes. If we think of the budget as $3500 then Obama's cut amounts to 10 cents and he's borrowing $1800. Update: Correction: The $17 billion amounts to $17 saved out of $3500. The 10 cents came from a previous proposed cut. I happen to be living as a fire evacuee (tens of thousands evacuated) while writing these posts and my living conditions (noise, heat, smoke) are cutting into my ability to think clearly.
Lying about the reasonableness of cost estimates causes large cost overruns.
But a professor at Oxford University in England has done a compelling series of studies trying to get at why big public-works projects such as bridges, tunnels and light-rail systems almost always turn out to be far more costly than estimated.
"It cannot be explained by error," sums up one of his papers, matter-of-factly. "It is best explained by strategic misrepresentation — that is, lying."
The professor, Bent Flyvbjerg (pronounced flew-byair), has become a flash point in civic-planning circles. Some think he's a rock star; others say his analysis is too cynical.
Rail systems promoted by lovers of mass transit suffer from especially high rates of lying. What does this tell us about the most enthusiastic mass transit supporters?
It started seven years ago, when he published the first large study of cost overruns in 258 mega-transportation projects. He found that nine out of 10 came in over budget, and that the average cost overrun was nearly 30 percent. Rail systems had an average cost escalation of 45 percent.
Okay, how to reduce the lying? How to make cost estimates more realistic? Got any ideas?
California 's chronic dysfunction shows America our future. We have high income and sales taxes. But the Leviathan just can't get enough. Constitutional provisions make it easier to increase spending than to increase taxes. Combined with liberal voters and a massive and growing immigrant permanent lower class the result is continued decay of the state government's fiscal position.
The bipartisan budget compromise passed last month included $12.5 billion in temporary tax increases, $15 billion in cuts, $8.5 billion in federal stimulus aid, $5 billion in borrowing and some funding shifts to close an unprecedented $42 billion deficit over the next 16 months.
Yesterday, Taylor said the budget has already developed an $8 billion hole because of a $6 billion projected revenue shortfall and $2 billion set aside in reserves. But he said the state could receive up to $3.5 billion more in federal aid for education, which could pare the shortfall to $3 billion or less.
While a deficit of that size would not be terribly daunting to lawmakers who routinely faced similar spreads in the past, the analyst forecast rapidly growing deficits starting again in the 2010-11 fiscal year.
“The reason for that is fairly simple. We have one-time solutions that drop out over time,” Taylor explained.
The projected deficit in 2010-11 is $12.6 billion, growing to $26 billion three years later. If voters reject Proposition 1A, the temporary tax increases approved last month would expire sooner, adding billions of dollars to the projected shortfalls.
How high will taxes go?
Former eBay CEO Meg Whitman is running for Governor of California as a Republican and she's campaigning against ballot measures coming up in May that Schwarzenegger wants to pass to close the $42 billion budget hole that preceded the new $8 billion budget hole. If these propositions do not pass the working assumption will rapidly change toward a much bigger deficit.
Proposition 1A would create a state spending limit and rainy day reserve fund while extending some of the tax increases that lawmakers and Schwarzenegger approved in the budget-balancing plan.
Proposition 1B would protect school funding when state revenue rebounds after a slump, and Proposition 1C would allow the state to borrow against future lottery earnings.
Propositions 1D and 1E would allow use of early childhood development and mental health funding for other children's programs. Proposition 1F would bar pay increases for state elected officials in years that the state runs a deficit.
Whitman said Proposition 1A was a "sustained tax increase masquerading as reform." She called Proposition 1B Proposition 1A's "working partner."
California governments are getting a large sum of money from Obama and the nation's taxpayers as part of Obama's stimulus spending. But most of that money can't be applied toward reducing the state deficit since it has to get spent on particular purposes.
To be clear, the federal spending package will actually deliver much more than $10 billion to California — some estimates peg the figure at as much as $50 billion in aid to local governments, business tax credits and other programs. But much of that money is earmarked for specific purposes, like unemployment and health benefits, and won't help plug the state's deficit.
Once the fiscal stimulus money is gone spent how are all the programs it funded going to get money to operate? These programs are creating more clients who want to keep the money and benefits flowing to them.
Obama's economic thinking remains stuck in 2007. He assumes he can turn American into a social democratic state by taxing the top two percent, by closing loopholes on hedgefund managers, and the like.
Yet, the problem of the rich getting richer largely solved itself in a few days in early autumn of 2008. I suspect that hedge fund managers won't be a bottomless source of taxable income in 2009, and for a number of years to come.
So, Obama will eventually realize that he'll have to squeeze the upper middle class: families making from, say, $90,000 to $250,000. He'll have to raise income tax marginal rates on this broad expanse.
If Obama wants to try to preserve all the old age entitlements currently promised he has to jack up taxes even for people making below $90k. If he wants to expand entitlements (e.g. to provide health care benefits to more working age adults and children) then he has to increase taxes even further. The coming financial crisis due to unfunded old age entitlements is going to collide with Obama's ambition to expand other social programs aimed at his younger supporters. Obama stands by the standard liberal position that Social Security and Medicare require only minor tweaks. But this position won't be sustainable as more baby boomers retire. I'm expecting de facto rationing of medical care in response to the entitlements-driven fiscal crisis.
Harvard economics prof Greg Mankiw says even under optimistic assumptions about US economic recovery Obama is going to end up with deficits after the economy recovers larger than Bush had.
During the period 2005 to 2007, the U.S. unemployment rate hovered in the ballpark of 5 percent. What was the budget balance? According to OMB historical documents, the budget deficit averaged just under 2 percent of GDP during those three years.
Now compare these results to the new Obama budget. For the moment, let's put aside concerns about the economic forecast on which the budget is based and take their figures at face value. According to the Obama administration numbers, the economy will reach normalcy of 5 percent unemployment in year 2014, and they project unemployment remaining at that level thereafter. (I infer they take 5 percent to be an estimate of the natural rate of unemployment, which seems reasonable.) What happens to the budget balance when we get to that long-run equilibrium? According to their numbers, under their proposed policies, the budget deficit will average a bit over 3 percent of GDP during that time.
Megan Mcardle says three quarters of Obama's planned improvements to cut the spending deficit come from scaling down the Iraq war and his other expected improvements in the US federal government's budget come from sources that are unlikely to help as much as he projects.
Take the Iraq war. We were not, under any administration, going to spend as much in 2015 as we did in 2005. But by treating that spending as an ongoing cost, Obama now gets to take as much credit for reducing it as he would for closing permanent air bases in Germany, or trimming Social Security. Reducing the cost of "overseas contingency operations" acounts for $1.5 trillion of Obama's much vaunted $2 trillion in savings. Likewise the AMT fix--with high-end incomes falling, deflation in the air, and homeownership rates declining, AMT collections are going to decline even without a fix; this lets them recognize the entire decline at a time when the numbers are so large that taxpayers are too dazed to notice the fall.
The Obama administration is hardly the first to calculate the numbers to allow them to deliver upside surprises; during the Bush administration, the forecasts issued by the White House's Office and Management and Budget started to diverge from those of the Congressional Budget Office in an unexpected direction: they became markedly more pessimistic. Few people think it was an accident that this allowed the Bush administration to deliver a steady stream of "Surprise! The budget deficit is falling even faster than expected!" announcements.
Megan doesn't think most of Obama's other sources of revenue improvements will pan out.
Obama needs those big bath numbers on the Iraq side, because it seems unlikely that a lot of the things he's counting on to bailout his budget are going to materialize. Health care savings are often promised by American politicians, but so far never delivered. The cap and trade revenues which are supposed to deliver $625 billion over the next 10 years are going to be politically controversial, and also, highly dependent on energy demand--if there are too many permits, they won't yield much revenue.
I do not think cap and trade will pan out as a revenue source because I think carbon dioxide emissions will plunge without carbon taxes. We are very close to the arrival of the oil production downslope after Peak Oil. If khebab is right then we've already peaked and the early stages of the decline will be sharp. Less oil produced means less CO2 emitted. US oil consumption flattened in 2006 and 2007 and declined in 2008. We may already be looking at peak US oil demand in the rear view mirror.
Update: Obama wants to get more money from upper income earners. He claims only the top 2% need to pay in order to fix our budget deficit problem. Let us put that in perspective. The top 7% pay 62% of all federal tax receipts.
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.
But that was in 2006 when the upper class were making big money. Their incomes have plummeted. Obama needs a lot more.
But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.
Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.
To pay for the old age medical entitlements will require several GDP percentage points. Make the taxes on the upper classes too high and they will not earn as much money. There are diminishing returns from higher tax rates and eventually higher taxes become counterproductive. So Obama will need to extend down his tax increases to the upper middle class and the middle class. But an attempt to do that will shrink his political base.
The carbon tax attracts him not just (or even mainly) because it deals with global warming (now rebranded as climate change). The carbon tax allows him to get more revenue without raising income taxes. To get more total GDP as taxes really requires more kinds of taxes. Value Added Tax is his best bet because it is much harder to avoid - spending abroad is the best way to avoid it.
One way to look at a huge American budget deficit: The US government is testing the willingness of China to fund America's budget deficit in order to maintain America's trade deficit.
The Congressional Budget Office predicted on Wednesday that the federal deficit would balloon to $1.2 trillion this year — even before Democrats pass an economic stimulus bill that could cost an additional $1 trillion spread over this year and next.
To a degree that would have been unimaginable two years ago, economists and politicians from across the political spectrum have put aside calls for fiscal restraint and decided that Congress should spend whatever it takes to rescue the economy.
Remember when home buyers and lenders put aside restraint and bid up homes and commercial buildings to ridiculous price levels? A new mania in the government has replaced the mania in the real estate market. Of course, the mania in the real estate market replaced the dot com mania. What I want to know: which mania will replace the government spending mania? Tulips anyone?
Ronald Reagan's previous post-WWII record deficit is getting beaten by a large margin.
The budget office said the $1.2 trillion deficit would equal 8.3 percent of gross domestic product, obliterating the previous postwar record of 6 percent, reached in 1983 under President Ronald Reagan.
If Democrats enact a stimulus program of $1 trillion over two years, which is possible, the deficit this year could widen to about $1.7 trillion or more than 10 percent of gross domestic product.
Think about that. More than 10% of GDP.
Obama is starting out as a big spender. But you can bet the US Department of Defense budget will take a big hit.
And that stimulus package could still face a difficult time in Congress if fiscal conservatives can successfully define its author as just a traditional big-spending Democrat in new clothes.
“In order to make these investments that we need, we will have to cut the spending that we don’t,” Obama said at a Jan. 7 news conference.
What else will Obama cut?
Changes in Social Security and Medicare? Are changes to reduce the rate of growth of old age entitlements politically possible?
WASHINGTON — Changes in Social Security and Medicare will be central to efforts to bring federal spending in line, President-elect Barack Obama said on Wednesday, as the Congressional Budget Office projected a $1.2 trillion budget deficit for the fiscal year.
Obama is a leftward leaning Democrat. So you wouldn't expect him to cut old age entitlements. On the other hand, Richard Nixon went to communist Russia and China while Bill Clinton signed the Republican welfare reform.
One way to cut old age entitlements is to gradually raise the ages of eligibility. These age rises do not cut montly payments or medical options. So they aren't as easily labeled as cuts. Another way to do it is to restrict what medical providers can get paid. This again avoids the cuts label because in theory you can still get whatever treatment that now gets paid less to get done. How far such cuts can go without reducing availability is one of the things we are going to learn in coming years. Price controls are probably going to play a big role in slowing the rise in medical spending.
Gov. Arnold Schwarzenegger said California's budget deficit has widened by another $3.6 billion in just the past few weeks amid a worsening economy, and that the total shortfall of an estimated $14.8 billion will keep climbing until the state legislature acts.
The state is only 2 and a half months away from running out of money.
By the end of February, the governor said, the state will be out of cash and forced to pay its bills with IOUs. The state's projected budget gap through mid-2010 now stands at more than $30 billion.
Recent balanced budgets were only balanced in name, not in substance.
Over the past few years, state budgets have been "balanced" with borrowing, raiding voter-designated funds, delaying payments, creative bookkeeping and a lot of wishful thinking about future revenues.
Few states are in as bad a shape as California. Only Arizona and New York have budget gaps bigger in percentage terms:
Arizona is expecting a budget gap in 2010 that will exceed 24 percent of its general fund budget. Other states expecting huge budget holes include: New York (20 percent), California (18 percent), Wisconsin (17.2 percent), Minnesota (14.7) and Kansas (14.5 percent), according to the NCSL report.
But those percentages were calculated before the most recent growth in California's deficit. By my calculation California has just about pulled even with Arizona. Also, California has played lots of games with trying to make budgets balance in recent years that put it in worse financial condition than states that haven't been delaying payments and engaging in creative bookkeeping.
The weather is still highly excellent. But state government infrastructure spending in California is headed for a complete stop due to the budget crisis.
SACRAMENTO — California will have to stop financing nearly all infrastructure projects within two weeks if lawmakers don't immediately solve the state's $11.2 billion budget shortfall, state Treasurer Bill Lockyer warned Monday as legislators met in a rare joint session.
About $5 billion in loans for highway projects, school construction and other public works would be cut off, just as Gov. Arnold Schwarzenegger and others are urging greater investment in such initiatives to help shore up the faltering economy, if the Legislature fails to act.
Cut off. Finito Baby! This ain't no party. This ain't no disco. This ain't no surprise either. Just last week Steve Sailer was predicting that state and local budget crises are going to cause a big cut-back in infrastructure spending even as Barack Obama tries to ramp it up.
California needs over $30 billion to balance its budget for Fiscal Year 2009 and it could get a lot worse than that. California and its counties and municipalities should not be worrying about starting expensive new construction projects. They should be worrying about meeting payroll in 2009 and 2010 for firemen, policemen, schoolteachers, and the like. I wouldn't be surprised if a year from now we see giant piles of Chinese steel sitting on the docks of Long Beach collecting dust while new California construction hiring is postponed indefinitely and Obama's infrastructure money is diverted to keeping current civil servants employed. Teachers and prison guards and the like will be renamed "human infrastructure."
The California budget deficit is going to grow even bigger.
California's budget deficit could reach nearly $28 billion over the next two years unless drastic steps - including raising new taxes - are taken to stem the fiscal bleeding, the nonpartisan legislative analyst's office said Tuesday.
...
Without bold fixes, the state will have budget gaps of about $22 billion a year through 2014, the analyst said: The budget deficit is so deep that simply cutting spending won't work without devastating funding to key programs such as education and health care.
Actually, the $28 billion figure is over just 19 months according to many news accounts. That's $1.47 billion per month of unsustainable red ink. But that's nothing compared to the $22 billion per year figure which works out to $1.83 billion per month. With 38 million people that works out to about $50 per month per person. But since most of them are poor or children or both we have to expect that the middle and upper class net tax payers (those who pay more in taxes than they receive in benefits) will foot most of the cost. So if you are well paid in California better find a way to spend a couple hundred dollars less per month. Gotta feed the nanny state and the illegal aliens.
Financial disaster coming to palm tree lined boulevards. Actually a ride thru LA is more notable for the enormous quantity of graffiti and other signs of urban decay.
Dec. 8 (Bloomberg) -- California will suffer a “financial disaster” if lawmakers remain deadlocked over how to address a widening budget deficit and a looming cash shortage, Director of Finance Mike Genest said.
The state is on course to start defaulting on debt.
State controller John Chiang said the state could face running out of money by March, be unable to borrow, and be forced to issue the equivalent of IOUs for only the second time since the Great Depression.
Think this is bad? In coming decades the state's demographic deterioration is going to make it much worse. The younger population isn't going to achieve as much educationally or in their careers. Sure, there'll still be a lot of really bright people in Silicon Valley. But they'll have to carry along too many others not so bright and not so high achieving.
There is one big weapon we could use to shrink the California deficit: deportation. But you aren't going to see it mentioned. Libertarians would rather that taxes go up than illegal aliens be deported. They'll claim they prefer smaller government. But we know that immigration from the 3rd World means a bigger lower class and more Robin Hood taxes to support the nanny welfare state. So libertarians favor higher taxes and larger government.
Update: Dan Walters says the California budget shortfall is even bigger than the state government is reporting.
And then there are retiree health costs. New accounting standards require governments to report costs of providing health care to retirees. A year ago, a blue-ribbon commission appointed by Schwarzenegger said state and local governments have a $118 billion unfunded health liability, with the state accounting for $48 billion of the staggering total.
Accumulating unfunded liabilities, accumulating public debt, accumulating private debt, going into hock with the world due to sustained large trade deficits, a deteriorating demographic situation, and assorted other building problems are starting to reach critical mass. The 2010s are going to have features of a long crisis.
California car drivers might soon pay 2% of the worth of their vehicle in yearly taxes.
Reporting from Sacramento -- State lawmakers began moving toward a deal this week to close California's deficit with the help of steeper car fees that would cost many drivers hundreds of dollars annually, according to people involved in budget talks.
Under the plan, GOP lawmakers -- most of whom have signed anti-tax pledges -- would vote to triple the vehicle license fee that owners pay when they register their cars every year in exchange for a ballot measure that would impose rigid limits on future state spending. Motorists' annual license fees would rise from 0.65% of the value of their vehicles to 2%. For a car or truck valued at $25,000, the increase would be $336.
By itself that car tax might only pay for a third of the shortfall expected in the next 18 months.
On the bright side, the public reaction to higher taxes might drive the voters to pass an initiative that places sharp limits on future state budget growth.
Some analysts say that in the current economic climate, the plan could be an unwise gamble for Democrats. Voters, they say, may be inclined to approve the kind of spending restraints that GOP lawmakers have long sought. The Republicans' proposed cap would limit growth in government to a modest percentage each year, regardless of how well the economy does and how much revenue flows into the state.
"I suspect the public would vote for it," said GOP political analyst Tony Quinn. "This deal could make a lot of sense from the perspective of Republicans."
Part of the "solution" proposed by the Governator is more borrowing. Enough borrowing already.
The man in the middle, politically and fiscally, is Gov. Arnold Schwarzenegger, who is looking about three years down the road, roughly coinciding with his departure from Sacramento.
Schwarzenegger's centerpiece is a 1.5-cent sales tax boost for three years. Another important piece is borrowing $15 billion against the state lottery's profits to provide $5 billion a year for three years. Many of his spending cuts are also limited in term.
Schwarzenegger's approach conflicts with forecasts of potentially immense deficits for many years because of economic uncertainty and the underlying structural deficit, and because so many recent fiscal moves are short-term gimmicks. It could leave his successor with a big mess.
Temporary measures will not fix the problem.
The latest deficit in the California state budget came on very quickly.
Nov. 6 (Bloomberg) -- California Governor Arnold Schwarzenegger said his state's finances have deteriorated so rapidly that a budget he signed just six weeks ago has already fallen into a $11.2 billion deficit and taxes must be raised.
How could we solve this problem without tax increases or spending cuts? Deport the illegal aliens and many state government costs would plummet.
Californians for Population Stabilization (CAPS) says that a 2004 study indicated that California's illegal alien population imposed a net cost of $9 billion per year on the state's taxpayers just for education, medical care and incarceration. "After adjusting the figure for current costs and increases in the number of illegal aliens, it would exceed the state's projected deficit," according to Diana Hull, the organization's president, "and this is a very conservative estimate."
We might be able to move to a budget surplus if we deported the illegals.
The costs of illegal immigration to California are likely much higher. A 2007 study by Philip J. Romero, formerly a research economist at RAND, top economic adviser to Governor Pete Wilson and later Dean of the University of Oregon School of Business, estimated that illegal aliens in California receive somewhere between $10 and $38 billion more in state services than they pay in state taxes.
We've imported a 3rd world population into a 1st world economy. Decay lies in our future.
Writing in the New York Times David Leonhardt says while the US budget deficit is ballooning that's nothing compared to the medical costs of retiring Baby Boomers.
Even before the crisis, the Bush administration was set to bequeath a $550 billion deficit to its successor. Now, a better estimate appears to be $750 billion — or 5 percent of gross domestic product. The only years since the 1960s that the deficit has been nearly so large were the early 1990s (almost 4.5 percent of G.D.P.) and the mid-1980s (with a peak of 6 percent in 1983).
Obviously, next year’s deficit is a problem. And if you assume the credit crisis isn’t about to lift — which seems smart at this point — the ultimate cost of the bailouts could conceivably go higher. Whatever the final figure, it should still be put in some context.
Despite everything, the biggest fiscal problem remains, far and away, health care. Based on the rate that medical spending has been rising, the Congressional Budget Office forecasts that Medicare and Medicaid will take up 10 percent of G.D.P. within two decades, up from about 4 percent now. In today’s terms, that would be the equivalent of adding at least $900 billion to the deficit every single year, in perpetuity. It makes the cost of the bailouts look like a rounding error.
Figures like $700 to buy securities in this financial crisis do not represent long term costs. The numbers being bandied about are for costs of buying securities which, in some cases, will have higher resale value in a few years. Whether the bailout becomes a net cost to taxpayers still remains to be seen. What is costing the taxpayers is the recession that the bursting bubble has caused.
The recession and financial crisis make me wonder about our ability to handle Peak Oil. Once world oil production starts declining 5% per year the costs of that will far exceed the effects of the housing bubble which caused the current financial crisis. That oil production decline will come on top of the huge surge in medical costs for retired Baby Boomers.
It gets worse. The younger generation includes a much larger fraction of low performing Hispanics. A group with poor academic performance, lower wage performance, and higher crime and illegitimacy isn't going to pay the taxes which the retiring white middle class paid.
Even worse, the US is running a trade deficit of about 5%. So we are living beyond our means and need to cut our living standards at least 5% just to start living within our means.
Combine an aging and less able population, Peak Oil, and the lingering effects of the current financial crisis and the 2010s do not look pretty.
Feel like living beyond your means? America is the place to be.
The budget deficit will jump by $246 billion to $407 billion this year, the Congressional Budget Office estimates in a report released Tuesday.
"Over the long run, growing budget deficits and the resulting increases in federal debt would lead to slower economic growth," the agency said.
The $438 billion projected for 2009 is still small potatoes in GDP percentage terms.
The fiscal 2009 deficit is projected to rise to 3% of GDP. Still, the budget deficit as a percentage of GDP has been higher before, in the 1970s and 1980s, reaching 6% in 1983.
Back in the early 1980s Federal Reserve chief Paul Volcker was pushing the US into repeated recessions in order to wring out inflation. Also, Reagan's tax cuts and defense build-up were expensive and of course entitlements were growing rapidly. So the US budget deficit was much larger then. Well, the Democrats want to show that they can outdo Reagan. Expect a much bigger budget deficit if the Democrats get their way with fiscal stimuli and good old pork barreling.
The still-emerging Democratic plan would pile more than $50 billion worth of new spending on roads, heating subsidies, aid to state governments and a further extension of unemployment benefits onto a deficit for next year that is already likely to near $500 billion. Loan guarantees for the troubled auto industry are also on the table.
"I would be surprised to see a package that would be less than, you know, $50 billion to $75 billion," said Sen. Charles Schumer, D-N.Y.
Come on Chuck, think big. $100 billion. $200 billion. Heck, why not $300 billion?
I am more worried about the trade deficit. Dr. Peter Morici, former Chief Economist at the U.S. International Trade Commission, points out we are going in hock to the world faster than the US government is going in hock. (same article here)
Today, the Commerce Department reported the June deficit on trade in goods and services was $56.7 billion, down from the $59.2 billion deficit in May. U.S. imports of consumer goods did ease, as a result of the recession in retail sales, but the cost of oil imports and the trade deficit with China continued to rise.
U.S. exports have been growing, but the trade deficit remains large because of high prices for imported crude oil and refined products, subsidized imports from China, and the continuing woes of the Detroit automakers. At about 4.8 percent of GDP, those pose a significant drag on the economy and combine to destroy thousands of high-paying U.S. jobs.
...
Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. The total debt is about $6.5 trillion, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year.
With assorted central banks trying to pump up the dollar and China boosting dollar reserve requirements of commercial banks in order to boost the dollar I do not see the international "market" allowing trade to be conducted on terms that I would recognize as free. But anyone who wants to correct this situation with tariffs is labeled anti-free trade by legions of economists. Makes sense to them but not to me.
Neither political party is proposing spending cuts to bring the US government back within its means. This party can't last forever. Big deficit. But party while we can.
WASHINGTON — The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation’s fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses.
I've previously posted that Barack Obama is going to be heavily constrained from enacting new spending programs because he's going to be faced with huge fiscal problems. Baby boomers retiring, Peak Oil, and other problems come due on his watch. Hard to enact nationalized health care under these circumstances.
We could be (and probably are) headed for an even larger deficit.
The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline.
The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.
Are we having fun yet? I say deport the illegal aliens as a way to cut back on costs of health care, welfare, education, and other social programs. Pull out of Iraq for a $150 billion or so a year savings. Raise retirement age eligibilities.
Obama does not want to say what he's going to do about this problem. He will say that he'll spend more on health care. Of course, that increase will come on top of increases for swelling ranks of retirees getting expensive Medicare.
WASHINGTON — The projected record federal-budget deficit of $482 billion will severely limit the next president’s ability to cut taxes and pay for pet programs, yet Barack Obama and John McCain are offering few specific ways to deal with it.
The new president will take office four months into a fiscal year whose deficit is likely to shatter the current record of $413 billion, set in 2004, the White House said Monday.
McCain has pledged to balance the budget by 2013, while Obama has no timeline. Both candidates pledge to keep most taxes low while revamping the country’s healthcare system and strengthening its military.
Suppose the East Asians decide to stop buying US Treasury bonds and opt instead to let their currencies rise against the dollar. The deficit could become ridiculously high as US federal, state, and local governments would then have to pay far higher interest rates for the money they borrow.
In fact, the federal deficit hit an all-time high of $311 billion for the first half of this budget year, reports the Treasury Department. And Congress is discussing further moves to help distressed homeowners and stimulate the economy. Iraq and Afghanistan will cost at least another $170 billion in supplemental funds through the end of next year.
Given the need, the current rush of spending might be understandable, say some deficit hawks. But they worry that Washington will use recession and war as excuses to stop caring about red ink altogether. They also warn that current deficits leave Washington ill-prepared to face an imminent explosion of spending on Social Security and Medicare caused by retiring baby boomers.
Withdrawal from Iraq would cut that deficit almost in half. Eventually the US government will feel compelled to pull back from expensive foreign commitments.
In theory tax revenue should rise this summer and prevent a $600+ billion deficit for the current fiscal year.
Tax receipts generally pick up in the summer, so the deficit is unlikely to surpass $600 billion. But $450 billion, or even $500 billion is possible.
But I expect rising oil and food prices combined with deepening fall-out from the popping of the real estate debt bubble to cause a decrease in economic activity this summer.
US General Accounting Office Comptroller General David Walker thinks "dramatic" tax rises, large cuts in government services, and dumping of US government debt by foreign governments are possible elements of our national future. Walker says we are not on a sustainable path (true enough).
“One of the concerns is obviously we are a great country but we face major sustainability challenges that we are not taking seriously enough,” said Mr Walker, who was appointed during the Clinton administration to the post, which carries a 15-year term.
The fiscal imbalance meant the US was “on a path toward an explosion of debt”.
“With the looming retirement of baby boomers, spiralling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks,” said Mr Walker, a former senior executive at PwC auditing firm.
Current US policy on education, energy, the environment, immigration and Iraq also was on an “unsustainable path”.
Note that he includes immigration on the list of areas which are costing us. That's right. Low skilled, low wage illegal aliens use far more in services (e.g. we pay to subsidize their medical care and to try to educate their kids and to imprison the criminals among them) than they pay in taxes. They are net liabilities.
Walker sees foreign holdings of US debt as a loss of sovereignty.
Mr Walker told The Times that foreign investors have more control over the US economy than Americans, leaving the country in a state that was “financially imprudent”.
He said: “More and more of our debt is held by foreign countries – some of which are our allies and some are not.”
If (or should I say when?) foreigners stop buying US debt then interest rates will rise quite a bit. We might find ourselves in stagflation with rising unemployment and rising inflation at the same time.
"The fact is, is that we don't face an immediate crisis. And, so people say, 'What's the problem?' The answer is, we suffer from a fiscal cancer. It is growing within us. And if we do not treat it, it could have catastrophic consequences for our country," Walker said.
"If nothing changes, the federal government's not gonna be able to do much more than pay interest on the mounting debt and some entitlement benefits. It won't have money left for anything else – national defense, homeland security, education, you name it," Walker warned.
In the first 10 months of this fiscal year federal revenues grew 7.4% from $1.97 trillion to $2.116 trillion. As a result taxes are taking a growing portion of the economy.
Earlier in the year OMB estimated that revenues as a percentage of GDP would reach 18.5 percent in 2007. But as of a month ago that figure had reached 18.8 percent, approaching the levels that typically produce popular demand for relief. But as spending interests become stronger and more widespread in Washington, popular demand for lower taxes faces more resistance. It seems safe to conclude that George W. Bush will go down in history as the biggest taxer and the biggest spender ever.
As a larger portion of the population becomes retirees a growing fraction of the electorate sees a vested interest in higher taxes to pay for their retirement benefits. In spite of the huge amounts of money wasted on the Iraq war Medicare/Medicaid and Social Security each use more money than the DOD.
So far this budget year, the biggest spending categories are programs from the Health and Human Services Department, including Medicare and Medicaid, $560.2 billion; Social Security, $516.1 billion; military, $437.7 billion; and interest on the public debt, $385.1 billion.
We should withdraw from Iraq to save money. The occupation of Iraq is a waste of money and lives. Also, we should start raising retirement ages for eligibility for old age entitlements and do means testing for eligibility. We should also stop and reverse the influx of low skilled workers. Stop adding more liabilities and get rid of some of those we already have.
Update: There's one other way to improve our fiscal position: Accelerate Education To Increase Tax Revenue, Reduce Costs. We can do this with technology such as prerecorded lectures and online tests to allow kids to learn at an accelerated pace all year long. We need standardized tests that allow kids and adults to earn credit and credentials without attending bricks and mortar colleges.
George W. Bush, the man who brought us a war that is now going to cost $170 billion in this fiscal year and who also signed into law a huge expansion of Medicare with a drug benefit, has backed away from his pledge to oppose all Social Security payroll tax increases.
"So far, no one in the administration has simply stood up and said, 'We will not raise payroll taxes in any way, shape or form,' " said Pete Sepp, a vice president for the National Taxpayers Union, which led a coalition of several dozen groups to write a letter asking for such an assurance.
Meanwhile, the House's top Republican on tax cuts, outgoing Ways and Means Committee Chairman Bill Thomas, warned last week that the White House has hinted that it will accept a tax increase on higher-income families in order to win accommodations from Democrats.
Upper class people helped get Bush elected in the first place. They got a lot of tax cuts from him in his first year in office and have done well as a result. Can't say I feel a lot of sympathy for them at this point. But I fear that the term "upper class", when used in the context of tax increases, extends all the way down to my level of income.
Bush wants to make a deal with the Democrat-controlled Congress on how to once again "save" Social Security.
Social Security could be the first test. Since November, Mr. Bush has said everything should be on the table in the effort to fix the program's finances -- a statement in sharp contrast to his declaration after the 2004 elections that "We will not raise payroll taxes to solve this problem."
I oppose this sort of thing because I want a financial crisis in old age retirement programs to force a big rise in the eligibility date to begin collecting. In a nutshell, since people are living longer they should work longer. We can not afford to have so many people not working, especially since medical costs per retired person are rising so rapidly (as are all medical costs).
Bush's attempt to create private Social Security accounts was a foolish and deceptive proposal that would have made the problem worse, not better. Though his now dead Social Security privatization proposal is small potatoes in the folly leagues as compared to his immigration amnesty and guest worker program proposals. If we to continue to take in any immigrants at all we need to demand that all immigrants are revenue positive, meaning they will pay more in taxes than they receive in benefits. Otherwise they just make an already huge problem even worse.
I also think that attempts to fix the underfunding of Social Security amounts to political grandstanding because Medicare is the far larger problem and Bush has made the Medicare problem worse, not better. Medicare is projected to consume 24% of all federal income taxes by 2019 and 51% by 2042.
Even the debt and deficit numbers you read about understate the size of the current US federal deficit. The audited financials of the US government show a deficit more than twice the officially reported one. Similarly, the cost of the Iraq war is far greater than the amount appropriated for it each year while the war is fought. Joseph Stiglitz estimates the total cost of the Iraq war might be as high as $2 trillion. Among the costs we will pay for in the future: long term care of the maimed soldiers who survive; interest on the debt incurred to fight the war; opportunity cost of pulling people out of the private sector to go fight in the war; and interest on the debt accumulated to pay for the war.
All these hundreds of billions and trillions of costs and unfunded liabilities add up. The United States has peaked as a world power. For demographic reasons (aging population and declining average IQs - and more here) and other reasons we are going to decline as a world power.
MACON, Ga., Oct. 10 -- The federal budget deficit shrank from $318 billion to less than $260 billion in the fiscal year that concluded in September, officials disclosed yesterday. It marks the second year in a row that the deficit has declined after ballooning in the early years of the Bush administration.
Note that if we withdrew from Iraq we could cut the deficit by another $100 billion per year.
The budget deficit got narrower due to much larger sums of money collected as taxes.
Still, the budget deficit is declining, in large measure because corporate and individual tax receipts have surged at a much faster rate than the government originally projected. The Congressional Budget Office estimated last week that government receipts were up 11.8 percent in 2006, to $2.4 trillion, the second-highest increase since 1981, surpassed only by the 14.5 percent increase last year.
Come the next recession tax receipts could fall wihile spending would continue to rise.
The tax collection increases had to be in the double digits because the rate of spending increase was very high. Spending increased by a phenomenal 9%.
Despite the good news about last year -- largely the result of a remarkable 12% surge in tax receipts from individuals and corporations that overwhelmed a nearly 9% increase in spending -- the smart money says the deficit is very likely to get deeper from here. "The world doesn't end, but the deficit goes in the other direction next year," says Douglas Holtz-Eakin, a former CBO director. Interest rates are rising, adding to the government's annual interest tab. Iraq continues to be costly. The revenue surge already is beginning to fade. And a slowing economy is likely to restrain revenue growth even further. A one-percentage-point drop in economic growth for a full year increases the deficit by about $35 billion.
There is no way for tax revenue increases to keep up with such a rapid growth in spending. The upper classes are experiencing a more rapid growth in income than the lower classes and the upper classes are in higher tax brackets. But the overall economy isn't going to grow fast enough for tax revenues to keep up with such a rapid rate of increase in spending.
As the baby boomers retire the big fiscal crunch will hit. Federal spending will continue to grow rapidly due to old age retirement benefits. Medical care costs will rise rapidly. At the same time, the younger population does not have as great a potential for high incomes and high productivity. As the population becomes less white and more Hispanic the average education level and skill level will decline. Lower earnings ability will translate into lower tax paying and more use of social services such as Medicaid due to much lower medical insurance rates among Hispanics.
When the battle over unfunded liabilities for retirement becomes joined in the 2010s how much of the financial shortfalls will get paid in tax increases and how much in raised reitirement ages, means testing of benefits, and outright cuts in benefits? If politicians attempt to close the shortfalls with large tax increases then the economy could stagnate and the shortfalls could grow even as living standards decline.
Chris Edwards of the libertarian Cato Institute says US federal government workers are very well paid.
The Bureau of Economic Analysis released data this month showing that the average compensation for the 1.8 million federal civilian workers in 2005 was $106,579 -- exactly twice the average compensation paid in the U.S. private sector: $53,289. If you consider wages without benefits, the average federal civilian worker earned $71,114, 62 percent more than the average private-sector worker, who made $43,917.
The high level of federal pay is problematic in and of itself, but so is its rapid growth. Since 1990 average compensation for federal workers has increased by 129 percent, the BEA data show, compared with 74 percent for private-sector workers.
In the last 5 years federal pay has increased at over twice the speed of private sector pay.
The structure of that workforce has also changed over time. There are fewer low-pay typists and more high-pay computer experts in the government today than there were a generation ago. But that doesn't explain why, as the BEA data show, federal wages have risen 38 percent in just the past five years, compared with 14 percent in the private sector.
Federal workers have excellent benefits including very high job security.
Federal workers receive generous health benefits during work and retirement, a pension plan with inflation protection, a retirement savings plan with generous matching contributions, large disability benefits, and union protections. They often have generous holiday and vacation schedules, flexible hours, training options, incentive awards, flexible spending accounts, and a more relaxed pace of work than private-sector workers.
Perhaps the most important benefit of federal employment is extreme job security. According to Bureau of Labor Statistics data, the rate of layoffs and firings in the federal workforce is just one-quarter the rate in the private sector. All these advantages in worker benefits suggest that, in comparable jobs, federal wages ought to be lower than private-sector wages.
Modest proposal: Make most federal jobs have the equivalent of term limits. Work for the federal government? For most jobs you should have to leave after 10 or 12 years. This would bring in new blood that is more experienced with how the private sector does things.
The US government's deficit looks set to start rising again.
A surge of unanticipated tax receipts will push this year's deficit down to $260 billion, a $58 billion improvement on last year's red ink. But the deficit will begin to rise again next year and will improve substantially only if President Bush's tax cuts are allowed to expire, the Congressional Budget Office said yesterday.
Come the 2010s and the retirement of the baby boomers will send the deficit soaring.
The budget office's figures provide ammunition for both sides. This year's deficit is not only projected to be lower than last year's, despite ongoing war expenditures and hurricane relief, but it is also $112 billion lower than the CBO estimated in March when it analyzed the president's budget proposals. Even after successive waves of tax cuts, tax revenue is rising faster than predicted, while spending, especially on Medicare and Medicaid, has been less than initially projected. The near-term budget picture "has improved significantly," analysts with the budget office concluded.
But the longer term outlook -- clouded by baby boomers who will be retiring just as the reach of Bush's tax cuts begins to expand -- has "not changed materially," the report emphasized.
This year's $260 billion deficit is projected to rise to $286 billion next year and $328 billion by 2010, only to plunge when the tax cuts expire in 2011.
Higher taxes? Cuts in retirement entitlements programs?
Update: The US government's financial state is far worse than a cursory glance at the current deficit and current debt would suggest. The reason? Unfunded liabilities. These are promises to pay future benefits using money that exceeds what the government can expect to collect in taxes. See my posts On The Medicare And Social Security Unfunded Liabilities, Social Security And Medicare Headed For Bankruptcy Sooner, Taxes For Aging Population To Trigger Political And Economic Death Spiral?, and Audited Financials Show Larger US Government Debt.
US states claim they are in great fiscal shape and they are upping spending in response.
NASHVILLE, Tenn. - Updated 4:30 p.m. - State balance sheets are the best they’ve looked in decades. States closed their fiscal 2006 books with nearly 25 percent more money than the previous year, according to the National Conference of State Legislatures' latest survey of states' fiscal conditions.
The extra revenue allowed 20 states to cut personal income taxes by $600 million; 24 states splurged more on K-12 education, and 25 states socked away more in their reserves for the current fiscal 2007 budget year, which for most states began July 1, NCSL said in a preliminary report released here Aug. 15 at the group’s annual meeting.
In a surprise to some, education -- not Medicaid -- is expected to be the fastest-growing category of state spending in fiscal 2007, reversing a six-year trend. Corina Eckl, director of NCSL’s fiscal affairs programs, said that "most states think that this is an aberration" because of recent Medicaid cost reforms and that she expects health care costs to continue to climb. "This is a temporary situation," she said.
Sound like happy days for the states? Not so fast. The New York Times reports that state and local governments have unfunded pension liabilities that run into the hundreds of billions of dollars.
It is hard to know the extent of the problems, because there is no central regulator to gather data on public plans. Nor is the accounting for government pension plans uniform, so comparing one with another can be unreliable.
But by one estimate, state and local governments owe their current and future retirees roughly $375 billion more than they have committed to their pension funds.
And that may well understate the gap: Barclays Global Investments has calculated that if America’s state pension plans were required to use the same methods as corporations, the total value of the benefits they have promised would grow 22 percent, to $2.5 trillion. Only $1.7 trillion has been set aside to pay those benefits.
In this supposedly fat time for state governments their irresponsible elected leaders are letting their unfunded pension liabilities grow even larger.
It was a doomed approach, leaving New Jersey to struggle with a total pension shortfall that has ballooned to $18 billion. Its actuary has recommended a contribution of $1.8 billion for the coming year, but the state has found only $1.1 billion, so it will fall even farther behind.
Illinois also duplicated one of San Diego’s pension mistakes. It tried to make its municipal pension plan cheaper by stretching its funding schedule over 40 years — considerably longer than the 30 years that governmental accounting and actuarial standards permit, and more than five times what companies will get under a pension bill that has just passed Congress.
It must have seemed like a good idea at the time. Back in 1997, New Jersey borrowed $2.7 billion in pension obligation bonds to fill a gap in its plan funding. These bonds –- sometimes called POBs -- are general obligation debt much like any other municipal borrowing, but they're issued in order to put the proceeds into the pension funds, not the general government coffers. The issuing city, county, or state bets that the borrowed money can be invested to earn more than the interest rate that the bonds must pay.
...
Then came the market bust in 2000, followed by two years of depressing returns that turned what once looked like a winning strategy into a dud. Since 1997, New Jersey's POBs have averaged an annual return well below the 7.6% they owe in interest, according to State Treasurer John E. McCormac. And that's before factoring in whatever the state paid its investment bankers to get the deal done.
New Jersey's unfunded liability is at least $25 billion.
My suggestion: state governments should enact legislation that requires all state local government agreements with unions to have 90 day delays before they take effect. During the early part of the 90 day periods the governments must use independent analysts to calculate and publish on the web detailed future expected pension costs arising from the union agreements. This would give the public time to object to expensive labor agreements.
When SENS technologies start to take off these financial problems will become much worse.
The big stock market boom of the 1990s left city pension funds in great shape in 2000. But large city government pension funds have become underfunded in the last 6 years.
In a report titled "How Big U.S. Cities Are Faring With The Pension Fund Meltdown," Standard & Poor's Ratings Services highlights select pension and debt statistics of the 20 largest cities it rates. This data show that the mean funded ratio (the actuarial value of assets divided by the actuarial accrued liability) of the 20 cities, which had reached nearly 100% in 2000, has since dropped to 84%.
"The degree to which this trend will continue depends on a number of unpredictable variables, including investment performance, actuarial assumption changes, and potential increases in longevity," said Standard & Poor's credit analyst Parry Young. "Unfortunately, cities have varying degrees of control over these factors."
Defined benefit pension agreements should have clauses that increase the retirement date as longevity rises. Also, if the rate of longevity increase becomes as fast as time happens (what Aubrey de Grey calls "Actuarial Escape Velocity") then pension fund eligibility should end.
Update: New York City's pension fund isn't in great shape either.
The chief actuary, Robert C. North, has prepared a little-noticed set of alternative calculations showing that the gap in the pension funds could be as wide as $49 billion. That is nearly the size of the city’s entire annual budget and the equivalent of the city’s publicly disclosed outstanding debt.
The existence of a big gap between the city’s future obligations and the resources committed to meet them does not mean the pension funds are about to run out of money. But it does mean that New York City is promising its current employees future benefits it might not be able to provide without big tax increases or major budget cuts. When such a reckoning might occur, if at all, is hard to predict.
Pensions are now one of the city’s fastest-growing expenses. In recent years the city’s required contributions to its pension funds have more than quadrupled, to $4.7 billion this year from $1.1 billion in 2001.
Ouch.
A set of books maintained by the US federal government to more closely match how corporations are required to account for costs and liabilities shows a deficit twice as large as the more widely used deficit measure.
The federal government keeps two sets of books.
The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005.
The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.
Congress has written its own accounting rules — which would be illegal for a corporation to use because they ignore important costs such as the growing expense of retirement benefits for civil servants and military personnel.
Last year, the audited statement produced by the accountants said the government ran a deficit equal to $6,700 for every American household. The number given to the public put the deficit at $2,800 per household.
The unfunded liabilities are going to start showing up in cash flows as the baby boomers retire. In the 2010s and 2020s the US government will try to cut back on retirement benefits.
Federal law requires that companies and institutions that have revenue of $1 million or more use accrual accounting. Microsoft used accrual accounting when it reported $12 billion in net income last year. The American Red Cross used accrual accounting when it reported a $445 million net gain.
Congress used cash accounting when it reported the $318 billion deficit last year.
Social Security chief actuary Stephen Goss says it would be a mistake to apply accrual accounting to Social Security and Medicare. These programs are not pensions or legally binding federal obligations, although many people view them that way, he says.
It is only a mistake to apply accrual accounting if the government does not intend to fulfill the obligations it has taken on. If the government does not intend to deliver on its promises (and it can not do so) then Congress should start passing legislation to retract some of those promises. The big political battle for the 2010s and 2020s is going to be over how much of the unfunded liabilities will be paid for by tax increases versus by benefits cuts. I'm predicting a big rise in the age of eligibility for many retirement entitlement programs..
You can read the 2005 Financial Report of the United States Government if you want the bad news in detail.
Cash-strapped states want to privatize highways and charge tolls as a money saving mechanism.
ATLANTA – America has a freeway problem.
It needs to spend an extra $118.9 billion - above and beyond current state and federal highway funding - to upgrade its roads and bridges through 2022, the Federal Highway Administration estimates. But motorists, already distraught over rising fuel prices, don't want to foot the bill with higher gasoline taxes. So politicians from Oregon to South Carolina are reviving an old solution: the toll road.
The financial positions of state governments will worsen as the percentage of the medical uninsured rises. Therefore I expect states to grow more enthusiastic about toll roads.
Gasoline taxes haven't kept up with overall inflation. Plus, cars get more miles per gallon. Hence states are not collecting as much money to pay for roads.
Politicians are scrambling for new highway funding options because traditional ones are dwindling. Gas taxes raised per mile of interstate highway, for example, have fallen by about half since the 1960s, after accounting for inflation, says the Reason Foundation, a libertarian think tank in Los Angeles.
States are leasing roads out to private operators.
Moreover, states are increasingly looking at an option already popular in Europe and Australia: leasing to a company the right to collect tolls on roads that it maintains. Illinois last week signed legislation that would allow such public-private partnerships. New Jersey is considering leasing out the New Jersey Turnpike. Texas has gone one better, partnering with Spain's Cintra to build a new highway - the $6 billion, 316-mile Trans-Texas Corridor 35 - expected to open in 2014.
Technological advances are decreasing the transaction costs associated with toll roads. Automated reading devices can scan appropriately outfitted carss to record their passing. This avoids the need for stopping to pay tolls. Also, if toll roads are given sufficient leeway in setting prices then the roads can raise prices during rush hours as a way to limit road usage. This can reduce time wasted in traffic jams.
Libertarian and free market advocates of privatizing public services will cheer this development. But I'm less enthusiastic. Why? Government will not shrink if it sheds some costs. See my post Do Tax Cuts Increase Government Spending? Higher taxes make people want government spending cuts. But the tolls won't be taxes. Governments will take the money saved by road privatization and just spend it on other things.We'll pay as much in taxes plus pay money to ride on toll roads.
Government fees on the airline industry are pretty high and set to go higher.
Airline passengers are giving an ever-increasing portion of their travel dollars to Uncle Sam, according to data released by MIT's Global Airline Industry Program and Daniel Webster College.
Airline ticket prices overall have actually dropped over the past several years, the researchers emphasize. However, many of the taxes and fees passengers pay, which fund a significant portion of the costs of U.S. air-traffic control and airport systems, are not linked to the base price of the tickets and have remained about the same.
As a result, the effective tax rate on airline tickets is steadily increasing, and will increase more under the Bush administration's recently released federal budget proposal, researchers report.
...
After the administration's proposed hike in security fees, passengers would, on average, pay 19 percent in taxes and fees on top of the ticket price, the researchers found in their update of last year's study. In 2004, passengers paid 16.1 percent in taxes on top of the price of a domestic ticket. This is up from 15.5 percent in 2002 and 10.9 percent in 1993.
Professor Joakim Karlsson of Daniel Webster College explains the significance of the study's results: "The airlines have lost the ability to raise airfares, even to just keep pace with inflation. The average round-trip ticket has dropped 40 percent in real terms since 1993. Meanwhile, average ticket taxes and fees have stayed relatively constant at $45 per ticket."
Karlsson adds: "With the total cost of taxes changing only slightly, the relative share of each ticket that goes to taxes and fees has been steadily increasing."
The federal government and airports currently add four types of taxes and fees to the basic cost of each domestic airline ticket. The administration's new proposal increases the security fee associated with passenger and baggage screening by up to $6.
$45, let alone $51 with the proposed new fees, strikes me as a lot of money for the government's portion of the costs for getting passengers from point A to point B. Where does that money go?
Private companies have to find cheaper ways to do things. By contrast, government services can become more expensive and, well, government does not have to worry about a competitor offering a cheaper alternative. Of course the terrorist threat has increased the amount of security precautions that are necessary. But the government probably doesn't need as much money per ticket to run the air traffic control system per passenger as it used to. The cost of operating the air traffic control system surely must scale up more slowly than the number of passengers carried. Airplanes have gotten bigger and so carry more passengers per flight. Also, computers have become far more able to track flights and route flights to avoid collisions and computers have become cheaper. Also, the basic software development costs for the system don't go up much as traffic goes up.
Governments need to try to develop ways to automate more government functions. Ticket fees for air flights are a reminder that all government services need to be scrutinized to look for obvious inefficiencies. The market is not going to enforce enough cost discipline on governments. Government operational costs need to be published in formats that would allow better outside scrutiny by knowledgeable citizens to identify areas ripe for potential savings