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2011 July 04 Monday
Public Release Of US Federal Data Cut

Vivek Kundra just quit as Barack Obama's Chief Information Officer. The reason for his quitting: His most important initiative, Data.gov, had its budget slashed. Data.gov was set up to release more data sets into the public domain so that individuals and other organizations could more cheaply do more with the data and cut costs. The initiative to fund data.gov has been cut from $35 million to $8 million.

The program was off to a great start, with hundreds of thousands of data sets becoming available, and entrepreneurs building thousands of innovative applications. Then the ill-considered race to slash the Federal deficit started. The Obama Administration agreed to cut e-government initiative funding from $35 million to $8 million. Never mind that Kundra’s programs had already saved taxpayers $3 billion over the past two years.

If it really saved billions and really can save more then the cut is pretty stupid. But then why was it done? A different guy, Vivek Wadhwa, argues that breaking the data out of expensive legacy systems threatens the contracts and jobs that maintain those legacy systems.

Here is the problem: the people who own the legacy systems often fear for their jobs if they give their data away. What happens when entrepreneurs from all over the world build systems and software that are a hundred times better than the junk they are maintaining and cost a fraction to run--that is the fear.

So the pressure has to come top down from our political leaders, and bottoms up from the electorate. We are wasting tens of billions of dollars at the city and state level.

I can believe that the US government has a lot of old expensive legacy IT systems with vested interests defending their continued existence. But we can't afford this sort of waste. The US government is headed for a sovereign debt crisis. Therefore it would be extremely timely to try to replace old IT systems with newer, cheaper, and more useful systems. The people in the US government, like the general US public, need to understand that we are poorer than we used to be and that we've got to take a far more frugal approach to running our society.

There is probably a lot of potential for cost-cutting at the state and local level by sharing IT infrastructure and by basically open sourcing software to be used by multiple governments. Take each state's Department of Motor Vehicles. A group of states could share software development costs for an IT system shared between them. Ditto for many other agencies common to multiple state, county, or local governments.

By Randall Parker    2011 July 04 10:42 PM Entry Permalink | Comments (1)
2011 February 10 Thursday
Unions Oppose Federal Employee Cuts

A 270,000 US federal government employee union is uniting with other government unions to drum up opposition to cuts in the federal workforce. Government employees should not be allowed to form unions and work against the interests of the rest of us.

"We're acknowledging that it's our union that has to carry the story of federal workers," John Gage, the outspoken president of the American Federation of Government Employees said Wednesday as the four-day legislative conference wrapped up.

"We're going to energize and activate 2 million federal employees and their families," Gage said, "to let their representatives know these attacks will destroy [federal] agencies." AFGE has joined forces with other federal unions to fend off the targeted cuts.

What motivates these union workers? See my post US Government Counties Highest Paid.

By Randall Parker    2011 February 10 11:11 PM Entry Permalink | Comments (5)
2010 November 11 Thursday
US Government Salaries Outpacing Inflation

Obama love for our rulers?

•Government-wide raises. Top-paid staff have increased in every department and agency. The Defense Department had nine civilians earning $170,000 or more in 2005, 214 when Obama took office and 994 in June.

You can't tell from the figures above what this really means, A large number of people below but close to the $170k threshold could have crossed over. Simple thresholds can be chosen to present a distorted view. But these figures are more telling:

•Long-time workers thrive. The biggest pay hikes have gone to employees who have been with the government for 15 to 24 years. Since 2005, average salaries for this group climbed 25% compared with a 9% inflation rate.

25% pay hikes while the public at large isn't even keeping up with inflation. That's telling.

Federal pay and benefits are going up like the whole country used to experience back in the 1950s and 1960s.

Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis.

A 3% per year increase in wages and benefits above the rate of inflation would translate in 10 years into a 34.4% increase in inflation-adjusted income.

A moral outrage, sure. But this trend in USG employee compensation will come to an end as the US sovereign debt crisis builds up over the 2010s and 2020s. I like Stuart Staniford's take on Debt Confidence Phase Transitions. He is right that the US government should not go so far into hock in reaction to the latest economic downturn because that accumulated debt will just make the crisis when Peak Oil hits full force that much worse. The US government will go into Peak Oil without any sort of reserve to throw at it. Rather, the US government will be weighted down by debts that will explode as a percentage of GDP as the economy shrinks.

By Randall Parker    2010 November 11 09:54 PM Entry Permalink | Comments (2)
2010 October 21 Thursday
British Government Slashes Spending

While the United States seems stuck on an unsustainable growth path for its welfare state the Conservatives and Liberal Democrats in Britain have agreed to huge cuts in government spending.

After months of preparing citizens for the worst, the coalition government unveiled cuts of 19 percent on average across most departments. The ax will fall particularly hard on welfare benefits, and the government plans to raise the retirement age from 65 to 66. Only a few priority areas are being shielded, such as the iconic National Health Service (NHS).

The US needs to follow Britain's lead. We can not afford our current government. We need to step back from the madness of borrowing like there's no tomorrow in order to spend more on dubious dreamy policy ideas in education, health care, and foreign policy.

By Randall Parker    2010 October 21 11:43 PM Entry Permalink | Comments (5)
2010 June 08 Tuesday
Big Spending Cuts For UK Government?

New British Prime Minister David Cameron is going to try to shift Britain off the road to financial ruin. Meanwhile, the Obama Administration and Congress are putting the pedal to the metal as they speed down that road the Brits are trying to get off.

Prime Minister David Cameron's government has been selling the current recession as a once-in-a-generation chance to reduce the role of government in British society and get control of an annual budget deficit that has grown to about 12 percent of gross domestic product – about four times the level that the European Union deems safe. The government has promised that spending cuts are being considered everywhere, from defense to schooling.

Whether Cameron's minority government can pull this off remains to be seen. But the Brits seem to realize they've got to cut spending or face ruin. So they've got that big advantage over, say, the people inside the Washington DC beltway or the Americans (notably retirees) who are sucking off the government teet.

In the Wall Street Journal Fred Barnes argues that if the Republicans gain control of the House of Representatives the result for the nations finances could be quite salutary. Bill Clinton showed some spending constraint once the Democrats lost in Congress.

Here are the numbers: Average nondefense discretionary outlays per year under Nixon and Ford increased 39.7% over those of Presidents Kennedy and Johnson, followed by another 39% boost under Mr. Carter, a 14% drop under Mr. Reagan, a 12% jump under the first Mr. Bush, a 7.6% hike under Mr. Clinton, and a 31.2% increase under the second Mr. Bush.

Only four times in the past half century have nondefense discretionary expenditures in real terms decreased in a two-year congressional cycle. And only Reagan's first Congress—controlled by Democrats—cut more (15.5%) than the Republican Congress that Mr. Clinton faced after the 1994 election (3.7%). The other two reductions came under Reagan (2.5%, the 1986-87 budgets) and the younger Mr. Bush (.01%, the 2006-07 budgets).

America has changed demographically so much since the Reagan era that financial rectitude just might not be in the cards. A sovereign debt crisis combined with a stagnant economy seems a more likely outcome. I expect Peak Oil wil assure this outcome.

By Randall Parker    2010 June 08 10:47 PM Entry Permalink | Comments (0)
2010 May 23 Sunday
US Government Big Regulatory Spending Surge

George W. Bush and Barack Obama pushed up regulatory spending by 75% to $59 billion.

Over the last decade, annual budget outlays for regulatory activities increased by more than 75 percent, according to a federal regulatory spending study conducted by The George Washington University Regulatory Studies Center and the Weidenbaum Center at Washington University in St. Louis.

The FY 2011 Budget of the United States Government calls for fiscal regulatory expenditures of more than $59 billion, the largest federal regulatory budget to date. Contributing to this increase is the number of full-time federal regulatory staff, which is also expected to reach an all-time high of almost 284,000 employees in 2011, up by more than 7,000 employees in 2010.

Obama hasn't had time to accomplish a 75% spending increase for regulatory agencies. So Republican George W. Bush was the agent of most of the increase. That doesn't fit with the stereotype of Republicans opposed to regulation and Democrats in favor of regulation. Bush was a big spender even on regulatory matters.

By Randall Parker    2010 May 23 09:54 PM Entry Permalink | Comments (0)
Welfare States Headed For Death Spiral?

Robert J. Samuelson sees welfare states in a death spiral.

What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.

Americans dislike the term "welfare state" and substitute the bland word "entitlements." Vocabulary doesn't alter the reality. Countries cannot overspend and overborrow forever. By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul-de-sac.

I've been arguing for years that the unfunded entitlements (old age medical care and state-supplied pensions) would finally hit a crisis stage in the 2010s. The real estate bubble and the oil price spike of 2008 have moved up the crisis point in many countries. The creation of the euro zone in 1999 has accelerated the arrival of the crisis in southern Europe by creating a false belief in the fiscal soundness of the PIIGS and therefore enabled them to run up more debt than the markets otherwise would have allowed them to do.

The financial troubles in Greece, California, and other nations and states serve as a warning of what's to come for nations that are not as close to the full maturation of their sovereign debt crises. Therefore the worst off American states (e.g. California, Illinois) and European countries (Ireland, Greece, Portugal) provide us with a view into our future. What we can see so far: cuts in salaries and benefits of public employees, lay-offs of public employees, cuts in welfare state programs that were previously viewed as sacrosanct, higher taxes, and varying degrees of public opposition to taxes as part of the solution.

The most important pattern I've seen so far: So far it looks like cuts in outlays (cuts welfare entitlements and cuts in public employee salaries and staffing) are playing a bigger role than tax increases in attempts balance government budgets. Will this trend continue to hold up as more governments hit the crisis stage in their finances? Cutting compensation of employees will become even more necessary once Peak Oil hits.

A New York Times piece by Steve Erlanger reports on growing realization in Europe that the younger folks are getting shafted by older folks. (not that he used such explicit terminology)

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

In Athens, Aris Iordanidis, 25, an economics graduate working in a bookstore, resents paying high taxes to finance Greece’s bloated state sector and its employees. “They sit there for years drinking coffee and chatting on the telephone and then retire at 50 with nice fat pensions,” he said. “As for us, the way things are going we’ll have to work until we’re 70.”

In Rome, Aldo Cimaglia is 52 and teaches photography, and he is deeply pessimistic about his pension. “It’s going to go belly-up because no one will be around to fill the pension coffers,” he said. “It’s not just me; this country has no future.”

Will the younger people in Europe turn against the welfare state as the size of the inter-generational wealth shift from them to older people grows?

Michael Gerson says we are entering a new age of austerity in the United States and Europe. However Obama and the Democratic Congress are still acting like Business As Usual (BAU).

In 2009, the federal government spent $1.67 for every $1 it collected in taxes. The Obama administration's budget proposals would dramatically increase publicly held debt as a percentage of the economy over the next decade, eventually slowing economic growth, fueling inflation and making America more dependent on the kindness of creditors.

How has our political system responded? Congress recently found $60 billion in savings in the federal student-loan program -- and promptly spent most of it on other education projects. President Obama's health-care reform cut more than $350 billion from Medicare spending -- and soaked up all of it and more into new health entitlements.

In Greece it is no longer BAU. In Ireland and Iceland BAU are well past BAU. Spain and Portugal have begun to enter the era of post-BAU. But in spite of record high deficits and persistent high unemployment the mood inside the Washington DC beltway is still very much one of denial and of hanging onto BAU assumptions. The US government is living beyond its means in its foreign policy of war and aid spending and it is living beyond its means in health care spending, old age spending, and educational spending.

Tyler Cowen sees the big crisis for the US still many years into the future. But I am confident that the crisis will hit much sooner when oil production starts declining.

That’s bad, but the American economy probably can manage it, at least if nothing else major goes wrong between now and then. A wealthy, diversified country which can borrow on its own currency, and indeed has the world’s global reserve currency, should still find investors willing to buy its bonds, especially since many other parts of the world face greater fiscal problems. And then there’s what happens after that. Rising health care costs, if they continue, will likely bankrupt the nation over a 20 to 30 year time horizon, most immediately through the Medicare program. It’s not as easy to control those costs as it may seem.

The way I see it BAU has less than 5 years to run in the United States.

By Randall Parker    2010 May 23 11:18 AM Entry Permalink | Comments (2)
2010 February 07 Sunday
Obama Continues War Hawk Military Spending

Republican war hawk Obama continues the military adventure spending of his war hawk predecessor.

WASHINGTON, Feb 1 (Reuters) - U.S. President Barack Obama on Monday proposed another two years of hefty spending in Iraq and Afghanistan, seeking Congress' approval for about $160 billion this year and again in fiscal 2011 to pay war costs.

Obama's big restraint has been to cut back from fellow Republican war hawk Bush's $185 billion for 2008 and $171 billion for 2007.

If you are in the war hawk camp you can relax. Don't worry. Even a $1.6 trillion deficit doesn't provide enough pressure to make a substantial reduction in US military interventions.

The US is overextended in many ways. We have an unsustainable budget deficit, an unsustainable trade deficit, and large unfunded liabilities for old age benefits. Ultimately health care costs will rein in military spending and Peak Oil will force big cuts in health care. But the party continues for now.

By Randall Parker    2010 February 07 06:26 PM Entry Permalink | Comments (7)
2009 December 13 Sunday
New US Government Debt Limit

The current US government debt limit of $12.1 trillion isn't big enough.

Congressional Democrats prepared to pass big spending bills and a roughly $1.8 trillion increase in the federal debt limit, all at a time when concern is growing over the government's chronic deficits.

Well, if the new debt limit is $13.9 trillion that's very close to the projected $14.26 trillion US GDP for 2009. In 2011 the outstanding federal debt might well exceed 1 year's GDP. But this is only a beginning. Surely the Obama Administration and Congress will break new debt records in future years. I see these people as achievers. Scaling new heights. Breaking new records. Doing things I would have considered impossible a few years ago. Change.

Their basic mistake: They take for granted the continued ability of the US economy to generate more goods and services.

By Randall Parker    2009 December 13 05:24 PM Entry Permalink | Comments (3)
2009 November 25 Wednesday
Americans Bad Financial Squirrels

The nation is not saving nuts for long winters. The US government has taken out a massive $12 trillion Adjustable Rate Mortgage and ARM rates are going to go up.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

Another $500 billion per year to debt interest payments is going to put a big crimp in the plans of the Democrats to grow the social welfare state. Rationing of health care is therefore inevitable. Blank checks for every test and expert consultation just won't be possible for everyone. Higher taxes to pay for these higher costs will lower living standards and slow economic growth.

This reminds me: I was explaining to someone this morning why Boeing is a bad long term stock hold. Peak Oil will kill airplane demand while the building US federal debt crisis will cause a slashing of US defense spending. The US global footprint is headed for a big pruning. Just as well, the US elites can't conduct a competent foreign policy anyway.

The next generation of America's work force isn't going to be as productive as the retiring Baby Boomers.

The American people are bad squirrels.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

Economist James Hamilton worries that the future trajectory of US federal deficits is headed for a wall.

But European politics may not import all that well to this side of the Atlantic. Receipts of the U.S. federal government have never exceeded 21% of U.S. GDP, even at the height of World War II. A permanent move to taxation levels significantly above that would require a major shift in the political landscape, for which I see no consensus of support. To me that implies that any spending trajectory inconsistent with the long-established U.S. norm may be headed for a political brick wall.

Hamilton disagrees with people who argue we can grow our way out of the forecasted much larger debt. I agree for a reason he doesn't mention: We can't count on economic growth. First off, America's demographics are deteriorating. Second, Peak Oil is going to cause a series of recessions followed by weak recoveries. If the economy stagnates then the deficit will swell and debt servicing costs will balloon.

China wants higher interest rates on US debt to boost their earnings. Failing that, the Chinese want their money back:

But seriously, if the Chinese would not lend to the United States then Americans would be better off. The US government couldn't run up as much debt if demand for that debt declined. Plus, the US dollar would fall and this would increase demand for US goods and help balance the trade deficit.

By Randall Parker    2009 November 25 01:35 PM Entry Permalink | Comments (9)
2009 October 18 Sunday
Obama Healthcare Revenue Sources

The middle class pays - contrary to Obama's campaign promises.

Think back to the 2008 election, when Obama promised again and again that he would not increase taxes on the middle class.

"And if you're a family making less than $250,000 a year, my plan won't raise your taxes one penny--not your income taxes, not your payroll taxes, not your capital gains taxes, not any of your taxes," Obama told an audience in Orlando, Florida, in August 2008, something he repeated at almost every opportunity.

This not the last tax Obama will level on the middle class. He can't do all he wants to do without casting a wide net.

One of the sources of tax revenue for the Obama medical plan involves taxing high benefit medical insurance plans that cost more than $8000 per year or more than $666 per month. Most of the people who have such plans are in unions and the rest are in upper management of some big corporations. So who is going to pay? The bulk of the money will come from people with yearly incomes less than $250k and more than half the money will come from people with yearly incomes less than $100k.

The analysis by the Joint Committee on Taxation concluded that tax payments would indeed rise. And it found that the middle class would be stuck with the tab.

87 Percent

The report projected that the excise tax would raise about $52 billion in 2019. Of that, about $8.9 billion would come from taxpayers with incomes of less than $50,000; about $19.4 billion from taxpayers with incomes between $50,000 and $100,000; and about $17.4 billion from taxpayers with incomes between $100,000 and $200,000.

Add those up, and you see that about 87 percent of the revenue in the original Baucus proposal to finance Obamacare would come from individuals with incomes of less than $200,000.

On the bright side, if you aren't in a union you probably won't pay - at least not for this particular tax. Other taxes in the plan will hit you though. Obama and the Democrats in Congress are putting taxes on the medical industry that will raise costs of medical services and therefore prices of medical services. This will push up co-pay costs and also insurance premiums.

Massachusetts is supposed to serve as the model for a national requirement to buy medical insurance. In Massachusetts costs are up and rising rapidly.

But insurance premiums for most residents are going up, not down. Many middle-class people who had insurance before the overhaul see little change -- except that they're spending more. They're seeing little or no difference in the quality of their care.

In crafting their plan, Massachusetts lawmakers ducked the tough issues of cost control, including how much public and private insurers would pay physicians and hospitals. So the state still has some of the most expensive medical care in the U.S. And costs are rising faster than the national average. Far faster than wages too.

We are as a nation poorer than our government acts. We are living beyond our means. The reckoning on that lies in the future.

By Randall Parker    2009 October 18 10:58 PM Entry Permalink | Comments (9)
2009 October 04 Sunday
Big US Government Jobs Hiring Binge

Government is a growth industry in the United States. It is a shame that it is a growth industry that doesn't create wealth.

A golden age of work for the government is just now dawning, according to a report released last week by the nonprofit Partnership for Public Service, a group in Washington that promotes government employment. There are several reasons: cyclical turnover; fresh demand in areas such as homeland security and veterans affairs, driven by the post-9/11 terrorist threat and wars in Iraq and Afghanistan; and the financial crisis, with the stimulus spending it has spurred.

Homeland security: We could make America substantially safer from terrorism if we just stopped granting most visas to people from Muslim countries?

By the fall of 2012, the Partnership estimates, the federal government will have hired 273,000 new workers for jobs the group calls "mission critical."

At least 12% of those jobs are costs of empire.

Because of the many U.S. soldiers returning from foreign wars, the Department of Veterans Affairs will be the most active employer, hiring 25,000 nurses and 8,500 doctors by 2012.

A lot of soldiers are coming back with long term health problems. More suffer brain damage than die. So we will be paying for Iraq and Afghanistan for decades to come.

By Randall Parker    2009 October 04 08:18 PM Entry Permalink | Comments (3)
2009 September 19 Saturday
Governments Waste Time Rather Than Charge For Services

In recession governments cut services that would be paid by the users of those services. This is wasteful and inefficient.

California drivers can't line up to renew their licenses Friday. Wisconsin natives can't order copies of their birth certificates. Georgia consumers will have to postpone registering complaints with state watchdogs. And stranded motorists in Maryland may have to wait a little longer for highway-department help.

Across the country, cash-strapped state governments are shutting down business for a day at a time to save money. State offices are shuttered Friday in California, Maine, Maryland and Michigan. Rhode Island had planned to join them until a judge on Thursday blocked its closure plan.

People would pay good money to avoid waiting for hours at a DMV office. This is avoidable waste.

A Department of Motor Vehicles office in San Francisco, meanwhile, was packed Thursday with more than 150 people. Last summer, without furloughs, wait times rarely exceeded an hour, but with three furlough days a month, people are waiting more than two hours each day, said Maria De Guia, a motor-vehicle field representative.

If state governments outsourced license renewal, birth certificate ordering, and many other document-related tasks then there'd be no need to cut services for these tasks during an economic downturn. Users could pay a fee for the cost of document processing and the out-sourcing company would fund its employees, offices, and computers from the fees collected. State governments could add additional fees for revenue generation (i.e. taxes) if they wished.

Furloughs amount to an attempt to dodge facing long term problems.

But furloughs do little to address fiscal problems such as ballooning pension costs, and some policy watchdogs fret they are a short-term solution to what is likely to be a long-term problem.

"Many states expanded health-care funding over the last decade and are now having real trouble paying for it," said Robert B. Ward, deputy director of the Rockefeller Institute. Educational programs and economic development also ballooned, he said.

I expect due to Peak Oil that spikes in oil prices to throw the US and other Western countries back into recession repeatedly for at least the next 10 years and likely into the 2020s as well. Governments need to accept they too poor to do all the things they do today. They need to scale back and live within their diminished means.

By Randall Parker    2009 September 19 01:01 PM Entry Permalink | Comments (9)
2009 August 30 Sunday
US To Become World's Largest Banana Republic?

Richard Russell puts the growing US national debt in a perspective that rarely gets mention: as the debt increases a larger fraction of all tax revenue will go toward debt service. The big expansion of US government spending happening now will be matched by a contraction in government programs as more money goes toward bond interest payments.

When the primary trend of the stock market is "blocked," I look for the law of unintended consequences to become operative. We already know that one of the consequences of the Bernanke-Geithner-Obama battle to halt the bear market is a build-up in debt in the US beyond anything ever seen in human history before. Over the next ten years the US will be adding $9 trillion to its national debt. If this occurs, the US will end up being the "world's largest banana republic." The dollar will have lost its reserve status. And the word "bankruptcy" will have a new dimension.

The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let's say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.

The interest rate could of course go much higher. A surge in interest rates could cause an acute crisis as programs must be cut back and taxes raised to pay the higher interest costs. Foreigners will eventually become reluctant to buy huge amounts of US sovereign debt. At that point interest rates will go up up up.

I do not write posts about this topic with the hopes of persuading a substantial fraction of the US population to oppose this madness. My own platform here is too small to make much of a difference. Rather, I write to warn my readers of what is coming. Plan your own financial affairs and make peace with the fact that a country you might feel pride and emotional attachment for is headed for a long lasting financial crisis. Too many developing problems will reach critical mass for this to be avoided.

It seems prudent to me to invest some money abroad. Americans need to reduce their risks from holding assets in the US and reduce the extent of our personal reliance on the health of the US economy.

Paul Krugman tries to argue that we aren't in all that much trouble since the US had an even higher level of debt at the end of World War II. But as James Hamilton rightly points out, the WWII spending surge was of short duration whereas all the unfunded liabilities for old folks medical care and other programs are of long duration.

And whereas in 1945 Americans could reasonably look ahead to a huge decrease in military expenditures, in 2009 when I look ahead what I see is a looming increase in federal medical expenditures.

I also believe it is relevant to compare these deficits not just with GDP but also with current federal tax revenues. $1 trillion is approximately the total personal income tax receipts of the federal government in 2006. My preferred metric for what each additional trillion dollars would require from me personally is to take what I paid in federal income taxes in 2006 and double that amount. To pay off $9 trillion, I'd have to do that for 9 years.

Unfortunately, $9 trillion may not be the whole iceberg. Diane Lim Rogers highlights the Concord Coalition estimate that current policy would imply a cumulative $14.4 trillion deficit over the next ten years.

At the end of the 10 years even bigger unfunded liabilities await. That's the real problem. We aren't just on a spending bender for the next 10 years. Beyond that lies even bigger demands for government hand-outs. Plus, the government's interest rate payments on accumulated debt will compete with the expanding entitlements programs.

As the tax burden rises so will the opposition of the non-recipients of this largesse. The next 20 years is going to be a continual battle over tax increases and debt. On top of all this the economists are ignoring Peak Oil and America's decaying demographics. Therefore they grossly underestimate the size of the problem.

My advice: work harder now to save money because in the future the marginal tax rates will be a lot higher. Salt money away now. Save and work longer hours. Look for ways to start up small side ventures to bring in extra bucks.

By Randall Parker    2009 August 30 01:08 PM Entry Permalink | Comments (21)
2009 August 10 Monday
Biggest US Tax Revenue Decline Since 1930s

The economic downturn has shrunk tax revenues to an extent not seen since 1932.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

Partly this is a reflection of the extent to which The Upper Class Funds The US Government. Incomes are more volatile for those at higher income levels. Therefore the revenues from income taxes have become more volatile as economic inequality has grown.

The Democratic Congress is on a spending bender.

The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.

The recession basically gave the Democrats an excuse to spend on things they wanted to spend on anyway. Where does this lead? See my post: Odds Of Eventual US Sovereign Debt Default?

By Randall Parker    2009 August 10 12:00 AM Entry Permalink | Comments (6)
2009 August 09 Sunday
Odds Of Eventual US Sovereign Debt Default?

Jeffrey Rogers Hummel, an economist at San Jose State U in Silicon Valley, says eventual US federal default on sovereign debt seems likely.

What about increasing the proceeds from explicit taxes? Examine Graph 1, which depicts both federal outlays and receipts as a percent of GDP from 1940 to 2008. Two things stand out. First is the striking behavior of federal tax revenue since the Korean War. Displaying less volatility than expenditures, it has bumped up against 20 percent of GDP for well over half a century. That is quite an astonishing statistic when you think about all the changes in the tax code over the intervening years. Tax rates go up, tax rates go down, and the total bite out of the economy remains relatively constant. This suggests that 20 percent is some kind of structural-political limit for federal taxes in the United States. It also means that variations in the deficit resulted mainly from changes in spending rather than from changes in taxes. The second fact that stands out in the graph is that federal tax revenue at the height of World War II never quite reached 24 percent of GDP. That represents the all-time high in U.S. history, should even the 20-percent-of-GDP post-war barrier prove breachable.2

The point about historical tax revenue as a percentage of GDP seems persuasive. How many Americans are going to support cutting their own effective buying power by 20% to pay for US federal entitlements programs in the 2020s and 2030s? On the other hand, the people who want to get stuff from the government and the people who want them to get stuff from the government are substantial factions as well (with some considerable overlap with the people who do not want to be taxed).

Currently I see Obama doing something that is the mirror image of what Reagan tried to do. Reagan tried to cut taxes to starve government and cut its size. Obama is trying to so increase spending that taxes have to rise to support the spending programs. Once the spending programs get established they develop powerful constituencies to defend them. If Obama can enact more new spending programs he increases the odds of a call for a tax increase as the needed fiscal response.

But the problem is that government is already on an unsustainable course with growth in entitlements spending before considering new Obama entitlements such as medical insurance funded by government.

Compare these percentages with that of President Barack Obama's first budget, which is slated to come in at above 28 percent of GDP. Although this spending surge is supposed to be significantly reversed when the recession is over, the administration's own estimates have federal outlays never falling below 22 percent of GDP. And that is before the Social Security and Medicare increases really kick in. In its latest long-term budget scenarios, the Congressional Budget Office (CBO), not known for undue pessimism, projects that total federal spending will rise over the next 75 years to as much as 35 percent of GDP, not counting any interest on the accumulating debt, which critically varies with how fast tax revenues rise. However, the CBO's highest projection for tax revenue over the same span reaches a mere 26 percent of GDP. Notice how even that "optimistic" projection assumes that Americans will put up with, on a regular peacetime basis, a higher level of federal taxation than they briefly endured during the widely perceived national emergency of the Second World War. Moreover, once you add in the interest on the growing debt because of the persistent deficits, federal expenditures in 2083, according to the CBO, could range anywhere between 44 and 75 percent of GDP.3

I see about 4 possible resolutions of the coming financial crisis:

  • US government default. This seems like the lowest probability outcome.
  • Huge tax revenue increase. Only one way to do that: Stiff European-style Value Added Tax (VAT) that raises prices 10-20-30%. Goods and services become as expense as we see in Europe. We get a permanent large European-style welfare state but with a worse outcome. I see the people who support this as enemies.
  • Inflation. This might happen thru the back door as a response to a financial crisis even bigger than what we saw last fall. The Federal Reserve's attempt to stop a panic will lead to an even bigger monetary injection than we've seen in the last year.
  • Massive cuts in entitlements programs. California's fiscal crisis provides a demonstration.

If and when the US dollar ceases to be the world's reserve currency a sharp transition caused by large scale flight from the dollar could cause skyrocketing interest rates and a downturn that causes one or more of the above resolutions. We might get some combination of the latter 3 possibilities in a series of crises with different levels of contribution from each item.

The biggest mistake the Democrats are making is to assume economic growth will fund their dreams. I see demographic problems slowing economic growth as a lower skilled work force grows up to replace the smarter Baby Boomers. Also, Peak Oil is coming at most 11 years from now and possibly much sooner. Economist James Hamilton has explained in his paper Causes and Consequences of the Oil Shock of 2007-08 how oil price run-ups cause recessions. Well, our current recession is basically a rehearsal for worse recessions to come in the 2010s as a result of high oil prices. The money isn't going to be there to make the government spending scenarios above remotely possible.

As people get poorer due to Peak Oil and demographic problems they will become more opposed to taxes on what remains of their take-home income. So I'm expecting some really severe cuts in entitlements. Expect to work longer. Expect more entitlements for old folks to become needs tested. Save now because you are going to need the money in years to come.

By Randall Parker    2009 August 09 05:49 PM Entry Permalink | Comments (17)
Congressional Health Plan Cost Estimates $1 Tril Too Low

Stephen T. Parente, a biz prof at U Minn and a member of a consulting firm that works with large medical cost databases, says Congressional estimates for costs of current health care legislation are low by over $1 trillion dollars.

The CBO is actually being kind to the would-be reformers. Its analysis likely understates—by at least $1 trillion—the true costs of expanding health coverage as current Democratic legislation contemplates. Over the last few months, my colleagues and I at the consulting firm Health Systems Innovations have provided cost estimates of health-care reform to both Republican and Democratic members of Congress, and we’ve posted these estimates on our website as well. We believe that the Democratic bills currently under consideration in the House and Senate would cost $2.1 trillion and $2.4 trillion, respectively—much higher than CBO’s figures.

The discrepancies between our estimates and CBO’s stem from our different assumptions about a key issue. The Democratic plans envision a government-run insurance program, modeled after Medicare, that will compete with private insurers. How many people would opt for coverage under this public insurance? We believe that both large and small employers would have powerful incentives to shift their employees out of private coverage and into the public plan. Like the Urban Institute, we estimate that roughly 40 million people would make the shift. CBO seems to assume, however, that large employers would use the public plan only sparingly and that only 11 million people would move from private to public insurance—which would, of course, result in lower costs.

To the extent that the US government subsidizes its own health insurance plan it will be able to offer premiums at below market rates. So it seems inevitable that it will take away market share from private plans. How can one expect otherwise?

Parente says he has a bigger dataset of commercial insurance data to work with that the Congressional Budget Office does not have.

Why the difference in these estimates? We believe that we have better data on this issue than the CBO, which uses simulation models of health-insurance plans based on much older health-plan data—typically from 2001 or even 2000. Our estimates are grounded in 2006 commercial-insurance data to which the CBO doesn’t have access (the data are not publicly available and the CBO didn’t make provisions to purchase them). These data reflect the advent of much cheaper, high-deductible health plans and limited-provider network plans. If the government modeled its public option on these inexpensive plans, the result would be cheap enough to lure far more people away from private health insurance than the CBO estimates.

We already have government entitlements programs that we can not afford. The aging population is going to cause the costs of those programs to skyrocket in the 2010s and 2020s. On top of that Peak Oil is rapidly approaching and will cause an extended economic contraction. Existing entitlements programs will have to shrink and suffer big benefits cuts as the economy contracts.

By Randall Parker    2009 August 09 02:09 PM Entry Permalink | Comments (3)
2009 August 03 Monday
Poor Jefferson County In Alabama

Jefferson County Alabama Spent too much on a sewer system and then got suckered by investment bankers into auction rate securities whose interest rates are too high for the county to afford. Jefferson County's multi-billion dollar debt and high interest rates have the county in such a bind that it has drastically cut back staffing. The state of California is an example of financial soundness by comparison.

Alabama's debt-ridden Jefferson County laid off about two-thirds of its 3,600 employees on Monday because of plummeting revenues, a move that will sharply curtail services in areas ranging from roads to courthouses.

Nothing like a good crisis to get rid of the dead wood. I'm thinking county employee productivity will soar. But the lesson here is that when investment bankers come knocking don't open your door.

The coroners were not cut. Can't keep the dead waiting.

Some departments will not be affected by the cutbacks, at least not yet. Those include the sheriff's office, because a Circuit Court judge has blocked budget cuts until county commissioners and the sheriff can work out an agreement; Cooper Green Mercy Hospital, which gets most of its money from the indigent care fund; and the coroner's office, which was spared cuts.

The county would be in deep trouble with getting roads repaired if a tornado or hurricane swept thru.

The most avoidable consequence? Huge lines at county offices for things that cost money.

If you need to run into the Jefferson County Court House for tags, license, or pretty much anything else you better think ahead. It's not just the four hour wait you'll need to prepare for, it's the fight for parking!

Think about it. Would you prefer to pay a few dollars more to avoid waiting 4 hours to get a license for your dog, car, or some other activity or property? Why hasn't the county just hiked some fees and used the money to pay for salaries of people who collect the money for the fees? Raise fees until the lines are fairly short. Increase supply and cut demand. This is easy.

The government is missing an opportunity to make more money off of people's desire not to waste time in lines. Ditto for construction site inspectors. Make the fees high enough and these functions of government can be totally self-financing with very fast service.

Another idea: fine criminals. Take DUI drivers for example. Sock it to them.

By Randall Parker    2009 August 03 11:08 PM Entry Permalink | Comments (8)
2009 July 23 Thursday
Obama Medical Plan Adds To Unsustainable Medical Costs

Barack Obama and his Congressional allies in the Democratic Party want to enact a big new entitlements program for medical benefits for the non-retired. Cost is a huge problem since the US deficit is already quite large and existing entitlements programs (which are mostly medical) are already on course to soar in costs. Douglas Elmendorf, director of the Congressional Budget Office, outlines just how much Medicaid and Medicare will grow as a percentage of GDP.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

I think those figures are optimistic because I believe the conventional wisdom about future economic growth rates in the US economy are unrealistic. We have demographic and geological (oil and other resources) problems that will hold down economic growth in the next couple of decades and beyond. So these entitlements programs will need to take larger slices of the US economy in order to fund growing portions of the population of retirees and of lower performing and lower earning workers.

Higher taxes will lower earning power. You will need to increase your before-tax income much faster than the rate of inflation in order to increase your after-tax income.

Medicare is a big obstacle for Obama's ambitions because Obama wants to fund medical spending for poor people in part by cutting spending growth in Medicare. The old folks (and those near retirement) are starting to push back against that idea. The existence of Medicare basically puts old folks in an opposing faction against the poor younger medically uninsured.

Everything else is going to get squeezed by medical spending and old age benefits.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

I think we should make a much more concerted effort to automate the provision of medical care and to reduce the need to see doctors. Software expert systems and lab tests done from samples collected at pharmacies should be elements of lower cost future of medical care. Rather than spend huge amounts of money on delivering medical care with current cost structures we should spend smaller amounts on automating the jobs of highly expensive medical care providers.

Leave aside for the moment whether you favor or oppose government spending on medical care. If the government is going to create a new and extremely expensive entitlements program it should be careful in the design of such a program and should know what will work and what will fail or be more expensive. The history of government medical programs has been far greater costs and problems than originally projected. Mitt Romney, who as governor of Massachusetts has experience extending health insurance to poor people, argues that the Obama administration is proceeding without proper analysis or understanding of how their medical plan will work in practice and that design of such a hugely expensive undertaking requires a lot more time and effort.

The legislation has almost nothing to do with cost reduction. Nothing I have seen in the bills that are being discussed by the Democratic leadership suggests that there will be a significant change in health inflation. This is an extraordinarily important topic and one for which there is a great deal of information around the world. Normally, if this were private enterprise, you would spend a great deal of time with brilliant analysts, looking at alternatives, evaluating lessons from foreign places, and perhaps even experimenting with some alternatives before unleashing them on the entire U.S. economy. Health-care reform is a matter that should be focused on allowing our citizens to have better health at more reasonable cost, as opposed to being thought of as a political success or failure. We really can't afford a lot of trillion-dollar mistakes.

The Massachusetts plan to raise the rate of medical insurance has not put a lid on costs.

Three years after mandating that residents get health insurance and requiring employers, insurers and taxpayers to chip in, Massachusetts has yet to control soaring costs that are eating up half its budget.

...

Dealing with cost and quality has proved trickier. Higher health care costs fueled a combined $9 billion gap in the state's 2009 and 2010 budgets that had to be closed last month, leaving less for education, public safety, the environment and other services.

Want less spending on education or the environment or public safety? Want fewer police and fewer prisons? Support expanded medical care spending. Better start lowering your living standard now. Get ready for the New Austerity.

Bush made a couple trillion dollar mistake in Iraq. Clinton, Bush, and Congress made an even bigger mistake with financial regulation. Now Obama and his allies are trying to make a far larger health care spending mistake. I'm opposed.

By Randall Parker    2009 July 23 06:43 AM Entry Permalink | Comments (2)
2009 July 19 Sunday
Obama Health Care Financing Problem Looking Bigger

The Obama administration claims their universal medical insurance proposal won't bankrupt the country because assorted cuts will come later.

President Obama's budget director on Sunday described a House bill on health care reform as "deficit neutral" even though it includes Medicare payments to doctors that would put the bill $240 billion in the hole over a decade.

Office of Management and Budget Director Peter Orszag insisted that Obama won't sign any health care reform that isn't paid for, but also said the legislation doesn't take into account savings that will be achieved in other bills to come.

But the pattern of medical spending programs from the US government is that they end up costing far more than originally projected. You've got to start out with a break-even original proposal because going forward reality will only be worse. The recent Massachusetts expansion of health care coverage provides yet another example of a program that costs more than originally projected.

It will not save money. In fact, according to CBO director Douglas Elmendorf, it will "significantly expand the federal responsibility for health-care costs," exacerbating rather curing the dire, health-care driven budget problems we already face. As Ron Bailey pointed out earlier today, this is the result when you use official government cost estimates. And as the Massachusetts experiment with universal coverage taught us, the true cost of any universal-coverage oriented health-care overhaul is likely to be far higher than projected.

It will likely shift people away from their current health-insurance plans. Depending on the final details surrounding the proposed public plan, some people will almost certainly end up moved
away from their current plans. At a bare minimum, Obama's promise that individuals will be able to keep their current health-insurance is misleading.

It will raise taxes.

Governors of both political parties oppose Obamacare because it will foist still more unfunded medical spending mandates on them.

The role of the states in a restructured health care system dominated the summer meeting of the National Governors Association here this weekend — with bipartisan animosity voiced against the plan during a closed-door luncheon on Saturday and in a private meeting on Sunday with the health and human services secretary, Kathleen Sebelius.

Read that full article. The states have huge deficits and they can't afford a huge expansion in Medicaid that the bills in Congress would force upon them.

Why the numbers will be even worse than projected: The US economy is going to grow slowly for the next 10 years if it even grows at all. The US government assumes rising tax revenues based on excessively optimistic economic growth projections. But the recent financial crisis, demographic trends, and Peak Oil will lower long term growth if long term growth even happens at all.

By Randall Parker    2009 July 19 10:20 PM Entry Permalink | Comments (6)
2009 July 07 Tuesday
California Credit Rating 2 Steps Above Junk Bond Status

2 more notches down and I'll be living in a junk bond state.

Fitch lowered its rating of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further.

Have the people who brought us this folly learned any true facts about the foolishness of their ways? I'm thinking NO.

The state is running a deficit of $3 billion for a population of about 37 million and growing. If that growing population was highly skilled and smart we could produce our way out of debt. But the population is dumbing down if anything.

While Gov. Arnold Schwarzenegger and lawmakers battle over closing a $26.3 billion budget gap, the state's controller last week was forced to issue IOUs for the first time in 17 years. Some county agencies, state vendors and taxpayers are getting paid in paper. The IOUs help the state controller stave off a deficit of nearly $3 billion for July.

The state also had a BBB rating back during the 2003 fiscal crisis which resulted in Arnold Schwarzenegger replacing Gray Davis as governor. But this crisis is worse because the economy is worse and likely to stay worse for years.

The state's cash crisis has become pretty severe. The state has now begun issuing promissory notes rather than pay all its bills.

The state last week started issuing "IOU" promissory notes for some bills to conserve cash for priority payments, including payments to investors holding the state's debt.

With bad economic news on unemployment and a big drop in the employment to population ratio I do not think California can grow its way out of this one. It has to cut, cut, cut.

By Randall Parker    2009 July 07 12:01 AM Entry Permalink | Comments (17)
2009 June 22 Monday
Cities Shrinking To Save Money

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.

By Randall Parker    2009 June 22 11:50 PM Entry Permalink | Comments (5)
2009 June 11 Thursday
Democrats In California Legislature Face Fiscal Meltdown

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?

State Treasurer Bill Lockyer says the legislature needs to vote with to solve the budget crisis with the belief they will not get reelected.

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.

By Randall Parker    2009 June 11 11:43 PM Entry Permalink | Comments (6)
2009 May 21 Thursday
California Budget Crisis Yields Some Benefits

California's budget crisis will push more illegal alien criminals into federal prisons from which they can then be deported.

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.

By Randall Parker    2009 May 21 10:47 PM Entry Permalink | Comments (6)
2009 May 10 Sunday
California Tax Revenues Fall More Than Expected

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.

George Will points out that state spending has gone up much faster than inflation and population growth.

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.

A budget deal between Governor Schwarzenegger and the Democrats in the legislature created some ballot measures that might close part of the budget gap.

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.

By Randall Parker    2009 May 10 02:02 PM Entry Permalink | Comments (6)
2009 May 07 Thursday
Obama's $17 Billion Budget Cut

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.

By Randall Parker    2009 May 07 01:14 PM Entry Permalink | Comments (11)
2009 April 29 Wednesday
Public Works Projects Go Over Budget Due To Lying

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?

By Randall Parker    2009 April 29 11:38 PM Entry Permalink | Comments (2)
2009 March 18 Wednesday
California Budget Deficit Grows Again

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.

By Randall Parker    2009 March 18 11:57 PM Entry Permalink | Comments (6)
2009 February 28 Saturday
Obama Will Need Much Higher Taxes To Fund His Plans

Steve Sailer says Obama won't be able to fund his social programs just from taxing the top 2% in income.

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.

By Randall Parker    2009 February 28 08:59 PM Entry Permalink | Comments (0)
2009 January 07 Wednesday
Record US $1.2 Trillion Deficit Could Hit $1.7T

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.

By Randall Parker    2009 January 07 08:46 PM Entry Permalink | Comments (4)
2008 December 10 Wednesday
California Budget Deficit Grows Even Bigger

It keeps getting worse.

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.

By Randall Parker    2008 December 10 11:55 PM Entry Permalink | Comments (11)
2008 December 08 Monday
California State Financial Disaster Approaches

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.

By Randall Parker    2008 December 08 10:11 PM Entry Permalink | Comments (3)
2008 November 29 Saturday
Higher California Car Taxes Coming?

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.

By Randall Parker    2008 November 29 01:40 PM Entry Permalink | Comments (7)
2008 October 12 Sunday
Financial Crisis Costs Low Compared To Retiring Baby Boomers

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.

By Randall Parker    2008 October 12 12:25 PM Entry Permalink | Comments (1)
2008 September 09 Tuesday
US Budget Deficit Soars

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.

By Randall Parker    2008 September 09 11:24 PM Entry Permalink | Comments (6)
2008 July 28 Monday
US Deficit Headed For Half Trillion Dollars

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.

By Randall Parker    2008 July 28 11:42 PM Entry Permalink | Comments (13)
2008 April 22 Tuesday
US Budget Deficit Hits New High

The US government is running a huge deficit now even before the baby boomers start retiring in large numbers.

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.

By Randall Parker    2008 April 22 10:58 PM Entry Permalink | Comments (12)
2007 August 13 Monday
David Walker Sees Gathering Fiscal Storm

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.

Everything other than entitlements and debt payments will get cut out of the federal budget as the fiscal crisis intensifies.

"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.

By Randall Parker    2007 August 13 10:54 PM Entry Permalink | Comments (15)
2006 December 24 Sunday
Bush Supports Social Security Tax Increase

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.

By Randall Parker    2006 December 24 01:55 PM Entry Permalink | Comments (4)
2006 October 15 Sunday
US Federal Budget Deficit Reduction Seen As Temporary

The narrowing of the US federal government deficit is a transitory phenomenon until long term drivers of spending increases overwhelm attempts to boost revenue and cut discretionary spending.

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.

By Randall Parker    2006 October 15 09:02 PM Entry Permalink | Comments (7)
2006 August 29 Tuesday
US Federal Workers Better Paid Than Private Sector

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.

By Randall Parker    2006 August 29 10:46 PM Entry Permalink | Comments (3)
2006 August 20 Sunday
US Government Deficit Scheduled To Rise

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.

By Randall Parker    2006 August 20 11:55 PM Entry Permalink | Comments (4)
2006 August 17 Thursday
US States Balance Sheets Not As Good As They Claim

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.

An attempt by the state of New Jersey to borrow and invest its way out of unfunded pension liabilities backfired spectacularly.

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.

By Randall Parker    2006 August 17 07:15 PM Entry Permalink | Comments (1)
2006 August 03 Thursday
Audited Financials Show Larger US Government Debt

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.

By Randall Parker    2006 August 03 09:41 PM Entry Permalink | Comments (5)
2006 June 07 Wednesday
Toll Roads Grow In Popularity

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.

By Randall Parker    2006 June 07 09:17 PM Entry Permalink | Comments (4)
2005 March 15 Tuesday
Government Fees Growing Portion Of Air Travel Costs

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

By Randall Parker    2005 March 15 12:39 AM Entry Permalink | Comments (5)
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