Saturday, March 06, 2010
Chop Or Drop
But the teabaggers are not wrong (or the CBO is a Tea Bag affiliate, as are all the Fed Governors). Our current path is completely unsustainable. The CBO just released its estimate for public debt by 2020 under current plans. Bloomberg article:
Obama’s budget proposal would create bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration projected, according to the Congressional Budget Office.Oops. The worst of it is that the more the deficit rises, the higher the costs to service our public debt, as risks rise and interest costs per trillion rise. Our government is currently running on an Option ARM mortgage financing plan which is due to explode in a few years.
The nonpartisan agency said yesterday the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020. By then, interest payments on the debt will have quadrupled to more than $900 billion annually, the report said.
Deficits between 2011 and 2020 would total $9.76 trillion, the CBO said.
For comparison, in fiscal year (pdf, see page 5) 2009 the Dept of Health and Human Services spent .8 Trillion, and the Social Security Administration spent .72 Trillion. In total, that is over 1.5 Trillion. It is obvious that our current levels of spending will eat up the tax revenues needed to pay for our entitlement programs; the obvious corollary is that everyone who depends upon government-funded services now has an extremely powerful interest in curbing non-essential government outlays. Department of Defense-Military outlays were .63 Trillion. We could cut the entire defense budget and not recover enough money to pay for our planned social spending. Our total outlays in 2009 were about 3.5 billion.
CBO here. A link to the full report online. A pdf link (1.8 mb, 180 pages)
We do have to raise taxes, but we cannot raise taxes enough to come close to funding this. Thus, we are going to raise taxes and cut spending, or we are going to be Greece. And most of us are going to be very, very poor if we turn into Greece.
Every single cute little project has to be measured against this crushing reality, every plan to send someone to college and forgive their debt, every plan to build a windmill, every plan to do anything we DON'T HAVE TO DO. No liberal who cares about the poor can evade this reality - the more we spend on non-essential programs over the next five years, the less money we will have to spend on those who truly need it in the future.
That is why progressives currently make no sense - most of their plans amount to spending more money on the middle class. A progressive doctrine that basically amounts to "screw the poor and the elderly" is not going to appeal to the liberals among us. And any unrealistically conservative doctrine (cut taxes, everything will be fine) founders on this reality as well. We are in the process of developing new political paradigms because we have to, not because we want to.
Note: See Table 3-3 for Mandatory Spending. Also see chapter 4, The Revenue Outlook. The following table assumes that current law is in effect (including the rise in taxes caused by the expiration of the Bush tax cuts):
Hey! I thought of a way to explain what this really means. Suppose we didn't want the publicly held debt to rise more than 2 trillion over the next 10 years. Here's some numbers. Starting with Treasury Direct's Debt to the Penny, we discover that on December 31st, 2009, publicly held debt was 7.8 trillion. As of March 4th, 2010, it was 8.06 trillion. Thus we are going add about 1.16 Trillion a year to publicly held debt.
The estimate for 2010 (see the Monthly Treasury Statement for Dec 2009) is that all individual income taxes will total 1.03 trillion for this fiscal year (Oct 09.Sept 2010). Because our interest rates will rise when the economy recovers, our debt servicing costs are going to rise quite a bit.
In any case, to fend off further increases in the publicly held debt (and higher interest payments), we would need to pretty much double each taxpayer's individual income tax bill. So whatever you are paying in taxes this year, multiply by 2. That's what it requires.
US Tax Brackets for 2010 (from Bluebook)
So - nothing could be simpler - if you are a single person earning 20K a year, just send 30% of each dollar after exemptions to the government. Plus 7.65% for SS/Medicare. You can feel better about your inevitable budgetary problems by contemplating that your no-good brother-in-law whose wife is always boasting about his job will be paying 66% plus 2.9% on his additional income, and you can both feel better because some folks will be paying 75% plus 2.9%.
There is one minor technical difficulty, though. Most people with mortgages will default on them over the next two years. So be prepared for your home's value to depreciate 30% more, okay? But otherwise, we're jake - good to go - unless, of course, the Democrats DO pass an additional entitlement package in the form of Obamacare, in which case you just need to increase your income tax by about 8%, okay?
This is where it becomes very entertaining indeed, because quite a few states now have top income tax rates over 10%. Like CA. So our wealthy Californian is going to be paying 75% + 10% + 2.9%. I expect they'll be out there just busting their butts to earn more.
And no, there ain't no other place to get it. We could spread this around by removing federal tax exemptions from retirement funds and government bonds, but aside from that there isn't much left to do. The CBO's analysis assumes that all the Bush tax cuts expire and that AMT is not indexed to inflation.
Also note that tax increases on this scale would reduce GDP growth, reduce expected employment taxes and reduce capital gains, not to mention projected corporate income tax receipts. So I have underestimated just a tad here. About a trillion, because I am expecting we will get that from increased taxes on capital gains and currently tax-excluded income.
Hope, Change, BS. Politicians have been feeding themselves from this menu for quite some time, but it does not taste so good on our plates.
We aren't going to do this - because we can't. The quicker we get down to figuring out what we can do, the cheaper this is going to be for all of us, and the more will be left for the those who really need it.
Looking at these numbers, is it at all right that families with incomes of over 50K are getting government subsidized insurance for their children? Should we really be planning to pay the college debts for those who go into government?
Is it right that federal government workers are paid so very much more than the private sector? A gap of over 30K in benefits alone seems a bit extreme, doesn't it?
The worst, and unpredictable, aspect of this adjustment involves political faction wars: Every group is going to do the damndest to preserve its privileges and foist the austerity on to someone else.
The bailouts have set a dangerous precedent in the matter as it provides ample fodder for the "us Vs. them" meme that's going to dominate the airwaves for some time to come.
More than the economy itself it is this political quagmire that worries me.
From a politician's standpoint, it makes sense--when the bills come due, you will be out of office, or dead.
From a citizen or stateman's point of view, it's tragic.
One issue I have with the harping on this administration is that few give them credit for being more honest about the problems facing us (as opposed to funding wars off budget, pretending that the 2010 tax cuts would be sunsetted, passing tax cuts when we're in wars, etc).
I'm not sure you can give this administration credit for being "more" honest. After all, they're still trying to claim that "health reform" adding piles of regulations, mandates, and price controls while making health care an entitlement is going to be cheaper than what we've got now. In general, they've been attempting to increase the quantity and power of identifiable special interests which are dependent on the government teat for sustenance, because those are the groups that brought them to power and will sustain them there.
They've been honest when it benefits them, whether that's more or less so than other administrations is really splitting hairs.
That's why I listed HHS & Social Security, to show that most of the problem is just demographics combined with our current programs. The Fed governors have been running around for years talking about this very situation.
But because the current administration is in power, obviously we have to talk about current policies. Also, everyone who thinks we can just vote R and solve the problem needs to remember that gee, McCain was proposing a new entitlement program of sorts for medical insurance, and cap and trade.
The WHOLE paradigm is broken.
Fboness - I think the name is so funny I tend to use it. I find the entire Tea Bag/Media hysteria roll-on-the-floor-funny.
What do you think of the VAT that's being discussed in Washington as a solution? My impression is that it would be disastrous, because of the disincentive to add value, and because it would be a massive disincentive to export finished product, as opposed to importing it. (Even if an exemption is given for exports, you'd have to fill out IRS forms in triplicate at every value-add along the chain stating that the product in question is intended for export, quarantine that inventory from domestic sales, etc. Exports would suffer greatly, particularly innovative exports.)
A consumer sales tax would be much better, although I've got problems with that, too.
If we do that first, politicians will just run on for a few more years and then we'll hit the wall just the same, but we'll be even weaker when we hit it. Also, we have to realize that any such tax will, as you say, hurt exports, and will hurt the economy. Regressive taxes in this economy are going to do great damage.
I guess I'm focused on exports because one way or another, the balance of trade is going to get back to even over the next 10 years, if it doesn't go into surplus. I don't think anything can prevent it from happening--we can do it by producing more, or we can descend into poverty.
But it can't do it all, either.
We need lots of private-sector capital investment, though, and in order for that to happen the regulatory and tax implications of investment in energy have to be reduced drastically. Not "clarified", as in knowing exactly how bad the EPA is going to hurt you, but reduced, as in fewer regulations and lower taxes on capital investment and the profit received therefrom.
I'm not so optimistic about that part.
Why are you so sure that interest rates and hence interest on the debt will rise?
Here's a nightmare scenario you left out: real interest rates rise, yet interest on the debt falls.
I know, THAT could NEVER happen. Just like aggregate house prices could never fall. And deflation is impossible in a fiat debt...I mean money... system.
Another thought. The people calling the shots don't give a damn about the majority. Just look at Hank Paulson's recent op-ed in the WSJ calling for entitlement cuts.
How is it we can afford trillions in bailouts? How is it we can afford decades of tax cuts for the wealthy? How is it we can't afford the promised benefits that were/are funded by contributions from the recipients?
Ponzi schemes only reward those that get out early.
Angry Saver (a kooky fan in the cheap seats out in left field).
It certainly is a nightmare scenario in which only the government can afford to borrow.
Gubmint Cheese, anyone?
"The WHOLE paradigm is broken."
We're playing Jeopardy.
Alex, I'll take "Intractable Unsustainable Problems" for the win.
Altogether, the circumstances seem as dangerous and intractable as I can remember. - Paul Volcker, February 11, 2005
We're still hoping the "Daily Double" or "Final Jeopardy" can save us though.
It's Europe that is heading out to the casino to spend their last Euros with the hope of winning it all back. And I believe you covered adequately the only times when that works here. (And thanks for the belly laugh on that one!)
See Carl's post on Europe.
How much of what we are doing is really for the benefit of various companies and not the whole country?
If we can't recover anything near the investment we are putting in some of these windmills, solar, etc, then we should cut funding. We don't have the money to throw away. If we can't recover the money we are putting in some of these rail projects, then we are throwing money away.
I want our economy to preserve the ability to provide food stamps and medical care for people who desperately need it. I really do not care about building up GE's business, or paying off GM's auto unions. The reason I don't care is because it is not sustainable; my analysis stops there. I think CR has done a wonderful job of covering the lunacy of the housing credit. But of course it was renewed, and who does that benefit? And it was renewed along with a bunch of tax breaks, with many of the largest beneficiaries being the companies that hugely profited off this boom. AIG got a windfall. Home builders got a windfall. Why do we keep funding the groups that got us into this mess?
I have ideas, but a lot of this boils down to the priorities of everyone else. People need to think about all of this and decide what we really need to do. Nobody died and made me God. The whole country needs to think about this choices and decide. There should be no protected groups and no sacred cows.
I don't think the average person is going to vote to starve some poor 50 year-old who can't find a job to death. Given the choice, the country is going to choose to cut somewhere else. That's why we don't have any sort of real public debate about our choices - everyone knows that the priorities of the citizens are NOT the priorities in DC.
It's Europe that is heading out to the casino to spend their last Euros with the hope of winning it all back."
My investments are sitting nearly 100% in US Treasury debt (inflation protected to some degree). I even bought the 30-Year TIPS in the recent auction and I intend to hold until maturity. I must have at least some faith left. Go figure.
The media sure loved that euro for a while though. Who wouldn't? It was such a sure thing! The higher its price went the higher its price went! ;)
trade war shouldn't scare us. We can't increase taxes on
our citizens as easily as we can tax imports. Perot was
Representative Paul Ryan has a pretty good plan to set things aright. It will mean cutting/freezing federal spending for a number of years as well as some jiggering with entitlements to make them less generous and kick in a bit later. You can read his "Road Map' here:
Seems reasonable to me.
If we could allow our energy industry to go toward natural gas, nukes, and drilling for our own oil many drags on our economy would be eased. There is no reason why we can't grow the economy at 4%without significant distortions with wise policy leadership at the national level. We aren't getting it from President Obama and the dem majority in Congress.
Don't forget to vote for fiscal responsibility in November.
What we all will face on a Federal level will be a significant cutting of spending sooner or later which will mean a very different looking America in the future. The military adventures and spending will be vastly curtailed resulting in large defense related layoff's along with NASA,SBA, mortgage underwriting related underwriting will be eliminated along with the pruning of most programs. All this cutting will impact a significant portion of Americans that thought their job was safe. The SS trust fund will no longer be raided by the political class and used to finance tax cuts or unfunded programs, a huge change in the political landscape.
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