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2011 April 13 Wednesday
Chump Change And Budget Cuts

In so many ways America's best years are behind it. Granted, technology is still advancing and so we'll get neater gadgets in the future. But demographically and financially the nation's headed down. Another sign of this: The recent budget deal. Before the recent budget deal between Obama and Congressional Republicans Boston U econ prof Laurence Kotlikoff pointed out the stakes they are fighting over are so small compared to the problem that it is hard to take the differences seriously.

The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot.

Kotlikoff was close but a bit optimistic: the final deal cuts US federal spending by $38 billion. We'll go over the fiscal ledge about 5 minutes later.

But wait, Philip Rucker of the Washington Post reports that some of that $38 billion in cuts are just accounting gimmicks. Note the use of "worst-sounding" about social program cuts. Worst-sounding to who?

But some of the worst-sounding trims are not quite what they seem, and officials said they would not necessarily result in lost jobs or service cutbacks. In several cases, what look like large reductions are actually accounting gimmicks.

The imaginary $4.9 billion cut:

The legislation includes $4.9 billion from the Justice Department’s Crime Victims Fund, for instance, but that money is in a reserve fund that wasn’t going to be spent this year. Crime victims would receive no less money than they did before the deal.

You might ask: Is the US government headed for a fiscal disaster? Yes. Are we going implement the severe cuts needed to avoid it? Nope. Not gonna happen. Remember that run-away train in one of the Back To The Future movies that went plunging into a canyon? That's America's future. You'll need some sort of floating boogie board to get off in time before it takes the plunge.

By Randall Parker    2011 April 13 06:36 PM Entry Permalink | Comments (1)
Chump Change And Budget Cuts

In so many ways America's best years are behind it. Granted, technology is still advancing and so we'll get neater gadgets in the future. But demographically and financially the nation's headed down. Another sign of this: The recent budget deal. Before the recent budget deal between Obama and Congressional Republicans Boston U econ prof Laurence Kotlikoff pointed out the stakes they are fighting over are so small compared to the problem that it is hard to take the differences seriously.

The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot.

Kotlikoff was close but a bit optimistic: the final deal cuts US federal spending by $38 billion. We'll go over the fiscal ledge about 5 minutes later.

But wait, Philip Rucker of the Washington Post reports that some of that $38 billion in cuts are just accounting gimmicks. Note the use of "worst-sounding" about social program cuts. Worst-sounding to who?

But some of the worst-sounding trims are not quite what they seem, and officials said they would not necessarily result in lost jobs or service cutbacks. In several cases, what look like large reductions are actually accounting gimmicks.

The imaginary $4.9 billion cut:

The legislation includes $4.9 billion from the Justice Department’s Crime Victims Fund, for instance, but that money is in a reserve fund that wasn’t going to be spent this year. Crime victims would receive no less money than they did before the deal.

You might ask: Is the US government headed for a fiscal disaster? Yes. Are we going implement the severe cuts needed to avoid it? Nope. Not gonna happen. Remember that run-away train in one of the Back To The Future movies that went plunging into a canyon? That's America's future. You'll need some sort of floating boogie board to get off in time before it takes the plunge.

By Randall Parker    2011 April 13 06:36 PM Entry Permalink | Comments (0)
2010 March 27 Saturday
CBO Says Even Bigger 10 Year US Deficits

The Obama Administration and Congress strive to thumb their noses at the capital market. Only girly men try to be fiscally prudent. Manly men in charge of the US government throw caution to the wind - just like in Latin America.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.

That $9.75 trillion on top of the debt the US government has already accumulated could put federal sovereign debt at about 90% of GDP - and that's assuming economic growth in a business-as-usual fashion. Throw in Peak Oil and the debt will hit well over 100% of GDP (likely 130-150% in my view). At that point the US will suffer a sovereign debt crisis. The US is on course to set a new yearly budget deficit record. Don't you like setting new records? Boldly going where no man has gone before. There's a frontier quality to America's fiscal trajectory.

Also, under the president's budget debt held by the public would grow from $7.5 trillion or 53 percent of GDP at the end of 2009 to $20.3 trillion, or 90 percent of GDP, at the end of 2020, about $5 trillion more than under the assumptions underlying the baseline.

But the debt will be $500 billion worse that even the CBO is saying because the CBO is required to make unrealistic assumptions about the fiscal effects of the health care bill.

That's only at the federal level. The recently passed ObamaCare health care bill sticks the states with new big entitlements requirements. These new burdens on state governments will inevitably force higher taxes at the state level and worsen the financial shape of state governments.

In California, policymakers estimate they will have to come up with an additional $500 million a year to make necessary increases in payments to Medicaid providers.

Across the country, state officials are wading through the minutiae of the health care overhaul to understand just how their governments will be affected. Even with much still to be digested, it is clear the law may be as much of a burden to some state budgets as it is a boon to uninsured consumers.

States with the largest uninsured populations, like Texas and California, might be considered by its backers the biggest winners to emerge from the law, because so many additional residents will have access to health insurance. But because those states are being required to significantly expand their Medicaid programs, they are precisely the ones that will face the biggest financial strains, in many cases magnified by existing budget shortfalls.

Lower tax states are able to be lower tax states in part because they hand out less free health care. But those states have just lost considerable leeway for deciding how much to spend on state-funded health care. Therefore the health bill just passed by Congress will make it harder for citizens to flee high tax states for low tax states.

By Randall Parker    2010 March 27 11:11 PM Entry Permalink | Comments (11)
2010 March 02 Tuesday
Time For A Balanced Budget Amendment

An article in the Wall Street Journal about whether Germany will bail out Greece mentions that the Germans have imposed a constitutional cap on the size of their federal government's deficit. The United States should do the same.

Germans grumble at the prospect of shoveling money at Greece at a time when Berlin is preparing to knuckle down with stiff austerity measures of its own.Germany has imposed a constitutional debt cap that requires the government to reduce its structural deficit to no more than 0.35% of gross domestic product by 2016, equivalent to spending cuts of €10 billion ($13.56 billion) annually from next year.

"Germany is the only country which has written into its constitution during the difficult economic and financial crisis a debt cap rule," Ms. Merkel said Sunday. "This means we know solid budgets are indispensable for the future the sustainability of our country."

The US has reached a state of fiscal insanity. While running a 10% of GDP budget deficit the US Congress is debating a huge new entitlements program for health care. The idea of finding ways to do savage cost cuts does not figure prominently since the goal is to expand coverage. We need to change the political calculus in Washington DC in a drastic way. Only a severely hobbled ability to run deficits will do the job.

Watch the recent Peterson-Pew Commission On Budget Reform. Former directors of the Congressional Budget Office propose less powerful approaches to the problem of chronic deficits. I find the whole discussion woefully inadequate. We need bigger guns to kill this problem. A constitutional amendment is the only gun big enough.

Absent a constitutional amendment I expect the US won't take needed measures until foreigners become unwilling to buy more US Treasury bonds and a full blown sovereign debt crisis suddenly hits. I'd like to avoid that outcome. Time for a solution that can work.

A balanced budget amendment can have clauses in it for emergencies. A supermajority of Congress (60% or perhaps 66%) could enable a larger deficit. Absent a supermajority vote we'd need a mechanism for how to cut spending. Would Congress be required to include language in any spending legislation specifying what to cut if revenue gets more than, say, 1% below spending? How to make a balanced budget amendment work?

By Randall Parker    2010 March 02 10:31 PM Entry Permalink | Comments (5)
2009 August 21 Friday
10 Year Deficit Projection Up To $9 Trillion

What's another couple trillion dollars to the 10 year US government deficit projection?

The new projections add approximately $2 trillion to budget deficits through 2019. Earlier this year, the administration had predicted that Obama's policies would require the government to spend $7.108 trillion more than it collects in tax revenue over the next decade.

Obama's health care plan might end up adding another $2.1 to $2.4 trillion to those costs. We definitely live in Warren Buffett's Squanderville, not Thriftville.

Of course that much of a deficit requires continued willingness of lenders to fund such a huge spend spree. We can not count on this state of affairs continuing.

Treasury markets have been worried all year about the mounting deficit. The United States relies on large foreign buyers such as China and Japan to cheaply finance its debt, and they may demand higher interest rates if they begin to doubt that the government can control its deficits.

I expect the numbers above are all optimistic. Why? America's demographics are deteriorating. The Baby Boomers will be replaced by intellectually lower performing younger generations. Plus, Peak Oil is going to knock the economy down repeatedly, denying the spenders the tax revenue growth they expect from a growing economy.

James Hamilton's paper Causes and Consequences of the Oil Shock of 2007-2008 explains what happens when oil price shocks hit the economy. We are going to experience a series of oil price shocks as oil production peaks and then declines.

Update: I am reminded of what Texas oil billionaire Richard Rainwater said in 2005: Rainwater expects Peak Oil will lead to higher taxes, a scaling back of government programs, and riots.

What concerns him most is the conflict that he thinks an oil shortage will precipitate. What happens when people get blindsided by prices rocketing past any level they have contemplated--especially when you factor in other challenges America faces? "We've got a lot of things going on simultaneously," he says. "The world as we know it is unwinding with respect to Social Security, pensions, Medicare. We're going to have dramatically increased taxes in the U.S. I believe we're going into a world where there's going to be more hostility. More people are going to be asking, 'Why did God do this to us?' Whatever God they worship. Alfred Sloan said it a long time ago at General Motors, that we're giving these things during good times. What happens in bad times? We're going to have to take them back, and then everybody will riot.' And he's right."

Riots? Depends on the slope of the downhill production slope. Given a sharp enough slope some countries will descend into chaos.

By Randall Parker    2009 August 21 10:27 PM Entry Permalink | Comments (7)
2009 August 20 Thursday
California State Pension Costs Not Sustainable

The California Public Employees Retirement System does not have enough money to meet its future obligations.

The CalPERS chief actuary says pension costs are "unsustainable," and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

"I don't want to sugarcoat anything," Ron Seeling, the CalPERS chief actuary said as he neared the end of his comments. "We are facing decades without significant turnarounds in assets, decades of -- what I, my personal words, nobody else's -- unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) ... unsustainable pension costs. We've got to find some other solutions."

The unions for California state and local government employees have gotten themselves such rich deals that the state is headed for an even bigger financial crisis than it is already in. The next generation is going to be less skilled and less productive. They won't earn as much and they'll demand more from government (e.g. more subsidized health care). The result will be a fiscal disaster.

By Randall Parker    2009 August 20 11:16 PM Entry Permalink | Comments (5)
2009 August 16 Sunday
California Debt Riskier Than Russian Debt

The market also thinks Michigan debt is riskier than Indonesian debt.

The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day. Brazil swaps just had their biggest four-month slide ever. For China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.

I'm living in a banana republic and I didn't even have to move. How cool is that?

Some US states are in serious trouble.

Most states have just approved a budget for the fiscal year that began July 1, and their legislatures have adjourned for the summer. But in a dozen or more states, those budgets have already gone into the red less than two months into the fiscal year, by a total of about $24 billion. More than 30 states are projecting deficits for next year, according to the Center on Budget and Policy Priorities, a Washington-based think tank, and other expert estimates.

You might expect that California can't borrow money or must borrow it at ruinous rates. Nope. Interest rates are so low that California might only pay 2.5% to borrow for several months.

Despite the much larger size of the RAN deal Lockyer is planning for September -- and despite California's image of fiscal dysfunction -- bond traders and fund managers were telling me this week that they thought the state might end up paying as little as 2.5% on the securities, given expected demand from yield-hungry investors.

So you gotta ask yourself, do you feel lucky? If you feel lucky you can get 2.5% tax free on California debt. Me, I'd rather buy stocks.

By Randall Parker    2009 August 16 10:41 PM Entry Permalink | Comments (9)
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 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 April 19 Sunday
Tax, Borrow, And Spend: America's New Political Model

The Democrats were the Tax And Spend Party. Then in response the Republicans became the Borrow And Spend Party. America has a competitive political market where the two parties try to outdo each other with new offerings. As a result, now the Democrats have now outdone the Republicans and become the Tax, Borrow And Spend Party. The ambition of the Democrats is startling.

The Congressional Budget Office estimated last month that President Barack Obama's budget proposals would produce $9.3 trillion in deficits over the next decade, a figure $2.3 trillion higher than the estimates in the administration's first budget proposal in February.

How were they able to do this? Events (the economic crisis) gave them an opening and they took it. Barack Obama's chief of staff, Rahm Emanuel, knows to exploit crises to achieve larger goals:

"Never let a serious crisis go to's an opportunity to do things you couldn't do before."

So the needed attitude was there at the highest levels. But what caused the Democrats to take this latest step? Clearly they wanted to increase spending for their constituencies and saw they could cover their spending plans inside of a need for fiscal stimulus. But the Republicans had already increased spending and had already created a big deficit in the process. Well, if the Democrats raised taxes they'd effectively just be funding spending increases that the Republicans already made. So the Republicans would get the credit for the hand-outs and if the Democrats had stuck with tax-and-spend then the Democrats would get blamed for the taxes to fund the spending increases the Republicans already made. So the Democrats felt compelled to do even bigger borrowing so that they could enact their own spending programs too.

David Walker, formerly comptroller general of the United States and head of the Government Accountability Office, argues that eventually taxes must double to pay for all the profligacy.

Meet Owen & Payne (, partners in a fictional accounting firm that specializes in helping Americans fill out the "new" Form 483000, which spells out how our elected officials are putting our nation into more and more debt and how that bill eventually will have to be paid: By doubling your taxes. The campaign is all in fun, but the intent is very serious.

Owen & Payne: Do you get the play on words?

Unless we begin to get our fiscal house in order, there's simply no other way to handle our ever-mounting debt burdens except by doubling taxes over time. Otherwise, our growing commitments for Medicare and Social Security benefits will gradually squeeze out spending on other vital programs such as education, research and development, and infrastructure.

Think of Tax, Borrow, And Spend as a bubble. Eventually the spending and borrowing will have to go down and the taxing will have to go up. The Democrats are carrying us the rest of the way to the top of the political economic bubble. But both parties contributed to the government bubble just as they both did to the private sector's financial bubble. While the private sector's bubble has popped the government's bubble is still inflating.

By Randall Parker    2009 April 19 12:17 AM Entry Permalink | Comments (2)
2009 March 21 Saturday
US Budget Deficit To Hit $1.845 Trillion

Can we run America down? Can we collectively act so foolishly that national bankruptcy becomes a possibility? Sure. We are going to average almost $1 trillion in debt per year for the next 10 years as Barack Obama tries to outdo George W. Bush in fiscal irresponsibility.

This year's budget deficit will hit $1.845 trillion, the nonpartisan Congressional Budget Office estimated Friday — a figure $600 billion higher than the CBO projected just six weeks ago.

The agency also predicted a total of $9.3 trillion in deficits over the next 10 years.

I think American triumphalism leads many to believe that surely we can't really and truly ruin the place. We keep doing more stupid things and ruin doesn't happen. So we begin to think we are immune. This just leads to doing even bigger stupid things. Hey, its not like we can be so incredibly stupid that we bust our biggest banks. Oh wait...

National debt will exceed 82% of GDP if events unfold as the CBO forecasts.

The result, according to the CBO, would be an ever-expanding national debt that would exceed 82 percent of the overall economy by 2019 -- double last year's level -- and threaten the nation's financial stability.

"This clearly creates a scenario where the country's going to go bankrupt. It's almost that simple," said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee, who briefly considered joining the Obama administration as commerce secretary. "One would hope these numbers would wake somebody up," Gregg said.

We are becoming more like southern Europe. A high debt puts us in league with Italy (with a public debt 105.6% of GDP for 2007). We are even bringing in Hispanic immigrants who some try to compare to Italians as a way to assure us it'll all work out. What could go wrong?

The retirement of the baby boomers and the worsening demographic condition of the country (the next gen isn't going to be as educated or as smart) are going to bring to a head a set of long developing problems. At a time when our problems are starting to come to a head Saint Barack wants to expand the Great Society. Really bad timing.

In his White House run, Obama assailed the economic policies of his predecessor, but the eye-popping deficit numbers threaten to swamp his ambitious agenda of overhauling health care, exploring new energy sources and enacting scores of domestic programs.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his Democratic allies controlling Congress would have to consider raising taxes after the recession ends or else pare back his agenda.

The battle of the 2010s is going to revolve around whether to cut benefits or raise taxes. Saint Barack is going to get one last big expansion of the Leviathan into place. But after that the cuts begin.

By Randall Parker    2009 March 21 10:38 AM Entry Permalink | Comments (9)
2008 November 24 Monday
US Federal Government To Provide $7.76 Trillion In Funds

The debt guarantees, loans, preferred stock buys, and commercial paper purchases are really adding up. Get your mind around the enormity of what's happening in banking as a result of the financial crisis.

Nov. 24 (Bloomberg) -- The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

That's a staggering number. What I want to know: Can the Fed inflate the money supply far enough to turn the price deflation into an inflation?

You hear a lot about the US Treasury's TARP program. But the Federal Reseve has lent more than 3 times the amount of money the US Treasury has provided.

Wall Street analysts, congressional overseers and the media have parsed every detail of the Treasury Department's financial rescue program -- $250 billion and counting.

Largely outside public view, however, the Federal Reserve is lending far more than that amount -- $893 billion, roughly the equivalent of the annual economic output of Mexico -- to help a wide range of institutions weather the economic storm.

As of last week, the Fed's loans included $507 billion to banks, $50 billion to investment firms, $70 billion for money market mutual funds, and $266 billion to companies that use a form of short-term debt called commercial paper. It is considering a new program that would make billions more available to prop up consumer lending: auto loans, credit cards and the like.

The changes away from previous trends at the macroeconomic level are breathtaking. The mortgage-backed securities (MBS) market has collapsed. Any mortgage lending can only be done by financial institutions that have enough money on deposit to fund new mortgage loans.

But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

Housing prices were inflated and need to fall further until ratios of housing prices to incomes and other housing price indicators fall closer toward historical trend lines. The collapse of the MBS market helps to drive that needed correction.

In the face of a rapidly contracting economy and falling prices the new Presidential Administration is looking to do a big spend to prop up the economy.

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years.

So far all the efforts to put Humpty Dumpty back together again are not working. Goldman Sachs expects the economy to start contracting at a 5% annual rate.

Last week, Goldman Sachs said it expects the economy to shrink even faster by the end of the year, at a 5 percent annualized rate. Meanwhile, the Dow Jones industrial average dropped 5.3 percent for the week; and the nation's largest bank, Citigroup, sought government assistance to avoid collapse.

Obama's economic stimulus probably isn't going to help. He'd do more good if he cut taxes in half and then the Fed bought up all the T-bills needed to finance the tax cut.

By Randall Parker    2008 November 24 09:41 PM Entry Permalink | Comments (5)
2008 November 02 Sunday
Current Financial Crisis Small Compared To What's Coming

David M. Walker, former Comptroller General of the U.S., argues that the current financial crisis is small potatoes compared to the coming unfunded entitlements US financial crisis.

At the dawn of the 21st century the U.S. had $5.7 trillion in total debt. As we approach the end of George W. Bush's presidency only eight years later, that sum has nearly doubled, thanks to war costs, tax cuts, spending increases, expanded entitlement programs, and now a welter of government bailouts and rescues.

This year was particularly bad. The federal budget deficit for fiscal 2008 hit $455 billion, up from $162 billion last year. That figure does not include the cost of the Emergency Economic Stabilization Act of 2008, which has an initial pricetag in the hundreds of billions of dollars. In fairness, some of that money presumably will come back to the Treasury, since the new rescue-related sums will be used to acquire preferred stock, mortgages, and other assets that someday could be sold at a profit.

Yet any such calculations are penny ante compared with the fiscal disaster that is bearing down on America.

The US old age entitlements are underfunded.

The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.

Do not plan on retiring at age 65. Here's why:

Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels.

My guess is that the problem is much bigger than Walker expects. Calculations of the size of the unfunded liability are based on assumptions about future economic growth. These assumptions seem excessively optimistic for a couple of reasons. First off, Peak Oil is coming. That's going to cut into per capita GDP and cause the US economy to shrink for several years. Second, the aging of the US population is not the only large demographic crisis we face. Poorly performing Hispanic immigrants will cause declining per capita income in California The economy in Texas will become more like the Third World as well. The lagging groups will not get better with time. So declining per capita GDPs seem inevitable - at least until either artificial intelligence or genetic engineering overwhelm this trend. The libertarian view of immigration is deeply flawed. This means that the leftist welfare state and the libertarian dreams for a smaller government will both take big hits. So will your living standard. Plan and work accordingly.

By Randall Parker    2008 November 02 01:00 PM Entry Permalink | Comments (22)
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)
2006 December 16 Saturday
China Demonstrates Flaw In David Ricardo Trade Theory

Political economist David Ricardo famously argued for the benefits of trade due to comparative advantages where each participant in trade comes out ahead. Steve Randy Waldman argues that Ricardo is dead.

First, the current incarnation of free trade is coming under pressure not because people are stupid, but because people are smart. The publics in countries like the United States and Britain have been remarkably tolerant of free trade over the last two decades, because the policy-relevant public "gets it", has been persuaded by economists from Ricardo on down that free trade is a positive-sum good thing.

Free trade is a positive sum thing if it is truly free trade and not the result of political distortions of markets. But that's not the world we live in.

Ricardo argued that free trade is mutually beneficial because it leads to specialization. But what happens when trade does not lead to greater specialization?

Free trade is positive sum because of specialization. The idea is that if someone else makes cars better or more cheaply than the UK can, Brits will do some other thing in which they have a comparative advantage, maximizing both overall productivity and the wealth of both nations. But there's a catch to this ancient Ricardian reasoning, a hidden assumption: The other thing that Brits do has to be tradable. If the UK stops building cars, and instead concentrates on home-building and retail sales, then there are no certain gains to trade.

In a nutshell: America is exporting debt rather than exporting products. So we aren't exchanging Chinese towels and shoes for US goods in industries where we specialize. Instead we are just exporting debt in growing piles while a succession of industries cuts back on production. In an amazingly long list of industries the US runs a trade deficit with China. This is madness.

Free trade is failing for a couple or reasons. First off, currency manipulation. The East Asians are buying large amounts of US debt in order to keep their currencies cheap. As a result the US trade deficit keeps growing and growing. Second, intellectual property theft is a problem. A US company that has to buy legal software and pay for the creation and use of intellectual property is at a competitive disadvantage to a Chinese manufacturer who can operate with all illegal software and use intellectual property of others without compensation.

The intellectual property theft problem reduces the amount of new intellectual property generated. If companies can not earn back the costs of developing intellectual property then they'll make less of it.

During recent talks with US Treasury Secretary Henry Paulson Chinese Vice Premier Wu Yi argued that China has to run a huge trade surplus with the United States and manipulate currencies in order to compensate for China's past abuse by colonial powers.

Wu's opening statement Thursday included a lengthy account of China's widespread poverty and history of colonial domination.

"It is our hope that by making an introduction on China's development road and economic strategy for our American friends (we can show) why we have chosen this development road and where it will lead us in the future," she said.

She thinks those Americans who oppose running a huge trade deficit with China do this because we misunderstand China.

"We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," she said, according to a text of her speech released by the government.

Why should our understanding of China - or lack thereof - have anything to do with the desire to avoid America becoming what Warren Buffett calls Squanderville?

Treasury Secretary Paulson made it clear to the Chinese that he wanted a reduction in our trade deficit because the American public is mad - not because the trade deficit is harmful to the national interest.

"The way I've articulated the situation to the Chinese is to look beyond Congress," Paulson said. "Congress is a reflection of the American public, and the American public has a perception that the benefits of trade between our two countries aren't being shared equally or fairly."

Following the talks, officials on both sides avoided any suggestion of concrete progress on the principal American demand that China should stop undervaluing its currency as a way to promote exports.

So sorry Chinese leaders. We'd be happy to go along with the Squanderville status quo. But our public forces us to go through the motions of complaining to you in hopes you'll stop pegging your currency. Not to worry though. We are just going to complain and then go home and do nothing. We are on your side on this and trying to ignore our own masses to the extent possible.

I do not think we should be bargaining with the Chinese over their currency manipulations and over our mounting debts to the world. We should just enact tariffs and gradually raise them till the trade deficit declines to a balance. But that course of action is anathema to the "free trade" zealots.

By Randall Parker    2006 December 16 09:36 AM Entry Permalink | Comments (24)
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