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Thursday, December 17, 2009

Even The Democrats Are Skeptical

There is a moment in every presidency, good or bad, in which the current president sticks his foot in his mouth. Obama appears to have just had one on the "pass the medical reform bill or we will be bankrupted by Medicare" gaffe. Judging by DU, that is. The GOP was laughing, but the Democratic base is also incredulous.

I have to admit my mouth dropped open, because none of these bills do anything but accelerate our budget problems. I'll get back to blogging more as the Chief's situation improves and my Christmas crisis is redressed, but here are some numbers:

Click on this table and open it in another window or tab.

The numbers in the table are derived from the September Monthly Treasury Statement which sums fiscal year 2009, available here.

There were several problems in 2009. We had extraordinary revenue shortfalls due to a severe recession, we had extraordinary revenue outlays due to a severe recession and the bailouts, and we are experiencing the first wave of retirement expenses. The first two problems might be expected to resolve themselves. The third has just begun to make itself felt. Note the relatively smaller increase in Medicare - a lot of the rise in Social Security outlays occurred from early retirements. In 2011 the Medicare bill will start shooting up.

By breaking out the outlays above, I hoped to give everyone a clue of our problem. Current federal medical, social security and military expenses alone consumed more than 100% of federal revenues in 2009. We got a break on interest rates on the national debt, but that will be short-lived. Adding expenses for the federal debt takes us to 118% of all revenue.

Obviously we can't afford to expand federal entitlement programs. All of the medical reform bills do. Something's got to give!

Nor can anyone expect a big rise in federal revenue next year. Initial unemployment claims show that. The last three weeks are 454,000 > 473,000 > 480,000. This time of year the seasonal adjustments are noisy, but these are still remarkably high numbers six months into a recovery. They are better than last years', though!

But the revenue is not there yet. Comparing daily treasury receipts for Dec 15th 2008 to 2009, a sad M_O_M notes that we still are lagging on WIET (74,888 to 67,080) and CIT (48,170 to 42,254). Further, PPI has recently been rising quite quickly, and the ability for businesses to pass costs to consumers is not there. This is restraining production, and predictions now are for substantial food price rises next year.

In short, we are in for another, less intense, round of the same old same old a la the end of 2008. Martin Feldstein. Corporations do not hire when they are not making money, and everything I know shows that larger corporations are still slowly cutting. The problem with the rise in food prices is that countries with stronger demographics almost all spend much higher proportions of consumer incomes on food than the developed countries; this implies that the Asian/South American carrying wave will be much lower than many economists are predicting.

Returning to the US situation, in the next ten years (by 2020) the US Census figures that the core working population will rise only 5.4%, whereas the retired segment will rise 36.2%.

The inescapable reality is that Social Security and Medicare will rise far faster than employment taxes. These are pay as you go programs - every dollar not covered by employment taxes is a dollar that must be borrowed by Treasury THAT year.

Therefore neither anything the Democrats are suggesting will help, nor is the GOP currently addressing the underlying problem.

We are going to raise taxes. We cannot raise corporate taxes, therefore we are going to raise taxes on individuals. (The reason we cannot raise corporate taxes or capital gains taxes is that doing so will cut investment and jobs - we need those jobs to employ the working age population.)

Because individual incomes are rather limited, we should address current tax-exempt revenue (not capital gains) streams such as bonds and retirement funds. It should be obvious that wealthier retirees will have to pay more relatively; we cannot expect a much smaller relative working population to cover the costs for a much higher relative retired population. In 2010 the retirees are 21.6% of the working age population. In 2020 the retirees are 28% of the working age population.

IMO the GOP will regain some power, but does not currently have the confidence of the general population sufficient to broker a new broad compromise. Either the Democrats will develop into that party (after the current leadership fails utterly and falls in an internal insurrection) or a new party will emerge.

We can greatly ease the demographic transition by following high growth policies that will generate more jobs, but that is not sufficient to cover these costs.

We also cannot cut Medicare costs. The proposals to do so are a farce. We could alter some reimbursement schemes for less-essential medical services, such as changing from a 80/20 reimbursement to a 70/30 reimbursement on some operations (cataracts, hip replacements, etc) judged to be less essential. But that is about all we can do. We will certainly have to raise the current Medicare tax about a percent, and we will have to raise Medicare insurance premiums substantially for wealthier retirees.

The Blue Dog Democrats are currently the only political segment really engaged with reality, although the rural GOP contingent has the same orientation. It will be very interesting to see the outcome of the 2010 elections. I think the Reid/Pelosi/Obama triad has killed off Democratic progressivism for a generation.

We live in interesting times!

The "Blue Dog" Democrats do seem to hold the political balance of power, don't they? The question I have there is whether they control a significant revenue stream. The "progressive" wing of the Democrat party has been funding the party for some time now, and disbursing part of those funds to pick up moderate seats in otherwise conservative areas. The Democrat party has, in effect, already fallen to an internal insurrection by its MoveOn/ACORN/union wing. They allied themselves with the financial system to cement the deal permanently. Those two groups are, after all, the current embodiment of the Northeastern elites that have run the country since the Civil War--Anderson Cooper is a Vanderbilt, fer cryin' out loud.

I'd have to say it's somewhat more likely that the Republican party also falls to an internal insurrection by the Tea Party or an ideologically similar group. It would be necessary to join with the moderate wing of the Democrat party to make this work.

I know the Republican "brand" is trashed, but this is solved easily enough by a re-naming exercise--the Tea Party already has its own brand awareness, so grafting it on to the institutional framework of the Republican party could be done. What's really important is capturing the legal advantages of being one of the two establishment parties.
Neil - as much as I cringe at the thought of the parties being "brands", you may well be right.

In any case, the left and west coast "progressive" states are mostly in bad financial fixes. I think a new era is here for everyone - the old expansionist politics is dead.

We will have to constrain government not out of ideology, but out of pragmatic reality. If we want to be able to help those who most need it, we will have to curb many entitlement programs.

It's notable that over the last two decades, the one thing the two parties have truly cooperated on were moves to edge out third parties.
Neil's right. I see no evidence that the Democratic Party will undergo a moderate counterrevolution. After all, the progressive wing thinks they are in trouble because they aren't progressive enough, and doesn't understand that progressivism's current goals come with unaffordable price tags.

On the Republican side, there is at least a chance that the fiscal conservative/libertarians can stage a coup. But I don't see any leaders yet that understand the scope of the problems, let alone any that are thinking of the solutions.
WSJ, understanding is not required, just proper action. Sadly, the best that humanity ever manages on a regular basis is to do the right things for the wrong reasons.
On second thought, Fred Thompson did talk about the fiscal problems ... and didn't get any traction at all. He ran too early; he might have gotten more traction in 2012 than in 2008.

But that's about the only candidate I remember who (a) talked about spending ourselves broke and (b) didn't propose to fix it by spending even more money more quickly.
"Understanding is not required" - but, Neil, unless I am greatly mistaken our current president just showed that he doesn't understand what is in the health care bills. At some level, a leader must have a basic understanding of the parameters of a problem to craft and defend a solution.

Obviously the population will not be happy to pay higher Medicare taxes, but still we must. And we can withstand a percent without losing massive jobs. We also need to be able to tell wealthier retirees why they are going to be charged more for premiums, and convey the reality that everyone is chipping in.

Also, if we do raise Medicare/Medicaid reimbursements, health care costs in the private sector will be restrained. This would tend to help create jobs.
John - Fred did. And the GOP lost a lot of support over its failure to be fiscally responsive. There are contingents in the bases of both parties that are very realistic.

There are also a growing number of "Independents" politically. They tend to be business oriented (many small business types), and perhaps eventually both main parties will end up defaulting on their responsibilities and a third party will emerge.

Can CA save itself from fiscal disaster? The same type of thinking running Congress now has run a great state into the ground. NY is in trouble. MA is in trouble. MD is in trouble. NJ is in trouble. The historical ruling elites have run us right into a ditch.

It is quite astounding to hear clerks, mechanics, secretaries, truck drivers and bank tellers discussing our problems realistically and then read of Congress Critters who appear to have just been resurrected from the 60s and beamed down by the Enterprise to raise havoc.
MOM - regarding understanding, I'm suggesting that we not get too hung up on the analysis applied by any particular politician, as long as the answers are close enough. Roughly, the required measures are to reduce govt expenditures by setting some priorities, and increasing revenues without disrupting business and investment.

I don't much care if a politician proposes to do so because little green men from Tau Ceti 7 told him it was the right thing to do, or because he simply thinks there's a majority of voters who will vote for those policies. I care that it gets done. History suggests that's all I can expect.
Neil - Oh, I agree. To some extent both parties' official platforms are separated from reality because they seem to claim that we have options which are in fact not available.

No, I don't care about motivation either. And I agree with your statement of the basic options. An honest liberal who understands our position isn't really going to come up with much of a different set of proposals than an honest conservative who understands our position. They probably would disagree on the end goal, but right now we are bleeding from major arteries and stabilization is the imperative.

I suppose I am hung up on my deep surprise over Obama's statement. It is true that Medicare is currently unfeasible, but the policy he is advocating makes things worse and not better.
Hey. Its's working so well for California...
Obama has earned his approval ratings and may well be remembered as a worse president than George Bush which takes some doing.And referring to the "Democratic" party in California as Liberal lies somewhere between hilarious and grotesque.Look at Feinstein and her hubbykins or Pelosi (Do not do this immediately before or after a meal,see how they actually vote and tell me how you can describe them as other than totalitarian kleptocrats or Apparatchiki?

The problem with the rise in food prices is that countries with stronger demographics almost all spend much higher proportions of consumer incomes on food than the developed countries; this implies that the Asian/South American carrying wave will be much lower than many economists are predicting.

For what it is worth, I think you are spot on.

China Asset Bubbles Will Burst on Inflation, Xie Says (Update1)


“Dec. 18 (Bloomberg) -- China’s property and stock markets are a “bubble” that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said.

“China’s asset markets are a ponzi scheme,” Xie, now an independent economist based in Shanghai, in an interview in Hong Kong. “Property is heading for one huge bust that will take a year and a half to unfold.”

I agree with Xie's premise but I have to wonder if it will take that long.
Thanks for this one, MOM. and thanks for taking time out of your busy schedule.

This headlong, take no prisoners drive to pass healthcare reform is just about the wackiest thing I've seen in politics. Obama's claim about bankruptcy is another stark admission that he really does not understand fiscal policy.

I expect to be paying more for my Medicare, because there is just no other rational way to go. It's not going to take food off my table, but many are not as well off.

There have been a lot of chain e-mails circulating among we oldsters complaining about no cost of living raise in Social Security this year. I think we don't need a raise because inflation has been benign. But then I read the USA Today piece about all the raises the federal employees are getting and I exclaim, "WTF!"

Obama and company (Reid, Pelosi, etal) seem to live in a bubble in which printing money solves all problems. Waaaaahh!

Now Letterman, Leno, and Stewart are mocking Obama on late night. I'm sensing a big change in Congress in 2010. It may not reverse much, but it might force some fiscal sanity.

In the meantime, I'm steering clear of most stocks.
Jobs- BLS has an interesting set of projection for job growth through 2018. Link:


My own observation is that our society has not come to grips with automation. Drive by any major road construction project and what is clear that it is all about heavy equipment not manpower and this theme runs throughout all phases of business from basic construction,manufacturing and office.
With the rising tide of debt service excessive credit creation and leverage are quickly losing their ability to boast the economy. The automation issue will have to be addressed in our tax codes, trade policies and overall economic framework as the search for job creation will need to go beyond political entrenched ideology.
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