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Monday, March 29, 2010

Why I Seem So Desperately Worried

Freight indicators appear to be good. Ocean freight especially. But rail is holding out YoY increases, and trucking for February was up a few percentage points YoY. This points to a continuing growth pattern, even if growth appears to be slowing. Initial claims for unemployment are slowing. Comparing the Daily Treasury Statement for March 25th, 2009 to March 25th 2010 shows that we are solidly above year-ago levels. FUT receipts, in particular, are way up. This is a strong predictor for later this year.

According to my normal methods, this is a recovery and it is sticking.

So why am I so worried? The consumer indicators are really bad, no matter what anyone says. From March through June we get a jump from lower household energy costs, so that should help a little. Unquestionably the Census jobs will help.

But here's the baseline reality that I just don't see in the official press releases. (Monthly Treasury Statements here.)
Treasury Monthly Receipts HI (Medicare 2.9% tax)
Feb 2010:
FICA Withheld: 12,605 (-9.5%)
Self-Employment: 131 (-5.76%)
Feb 2009:
FICA Withheld: 13,933
Self-Employment 139
Feb 2008:
FICA Withheld: 15,107
Self-Employment 136
Treasury Monthly Receipts OASI (Old Age & Survivors):
Feb 2010:
FICA Withheld: 41,627
(-7.8%)
Self-Employment : 306 (-3.7%)
Feb 2009:
FICA Withheld: 45,155
Self-Employment: 318
The Medicare tax has no upper limit - it is charged on all wages. Thus it is a "true" indicator of total wages and salaries, ex benefits.

Note that capped wages for Social Security dropped less than Medicare wages. This shows that the higher end salaries lost the most. Obviously our ability to recover by taxing the well-off is being impaired.

For comparison, January was much better. And I expect March to be much better. I'm thinking some receipts got dropped for February and will show up in March, plus we should have some help from Census. There is also an adjustment Treasury is putting in there to move some taxes from one year to another, but they didn't have it footnoted in the most recent release, so I don't know. I think a significant portion of February was lower financial bonuses.

Treasury Monthly Receipts HI:

Jan 2010:
FICA Withheld: 15,452 (-2.9%)
Self-Employment: 2,288 (-3.6%)
Jan 2009:
FICA Withheld: 15,921
Self-Employment 2,371
Jan 2008:
FICA Withheld: 15,989
Self-Employment: 2,262
However we slice it, we are down YoY. This does not mean that personal incomes have fallen as much as wages and salaries have. There is significant replacement stemming from two sources: unemployment benefits and early retirements.

Fiscally, this represents an extreme problem. When people roll off their unemployment benefits personal income will fall like a rock. I doubt that we can have people on permanent unemployment, and if we do, you will see those federal deficits rise even more than predicted. As for early retirements and Social Security, the Social Security benefits are stable in the next decade. They will be paid. But every time an older person has to retire because of no job, the wage base that generates funds for the Social Security and Medicare programs is trimmed back.

This spring the new Social Security and Medicare trustees reports will be released. It will be fascinating to see their projections. Here is the 2009 Summary (covers 2008) and the 2009 Social Security Trustees Report (html). These reports now rank as the wildest of fantasies; even the "high-cost" projections had contributions rising in 2009 and 2010 as compared to 2008. Haha. Gravity prevails.

Needless to say our Medicare problems are exploding like a bomb. A person born in 1950 will be eligible for Medicare in 2015. Medicare was already in deficit in 2008 (link to 245 page pdf Trustees Report). Part A (hospital insurance supposedly funded by the 2.9% Medicare payroll tax) had ex-interest income of about 215 billion. Outlays were 235 billion. The 2009 report is going to look a lot worse! So we were in deficit already, long before the retirement bulge even was due to hit.

It should be obvious that we can't afford much in the way of regressive taxation. Nor we can we afford any new entitlement programs, especially those that pay benefits to people who are relatively well-off.

One of the factors hurting businesses this year is the big jump in unemployment taxes. We knew about that, but it doesn't help firms.

It looks to me like we only have a couple of years to stop the slide before we hit the wall. Our deficit problem will get much, much worse over just a few years, and with each year that it does our future options get more constrained. It's not so much the yearly deficit, but the funding tax we will be hit with as the yields on the Treasuries grow inexorably.

So I wouldn't worry too much about the health care bill that just passed. We don't have the money to pay for it. It will never happen. It's just a further excursion into fantasy. It is not a serious attempt at reform, because health insurance costs are rising mostly as a displacement from the underpayments of government insurance programs, and this "reform" only increases government insurance.

Focusing on unemployment rates currently just misses the reality. Focus on salaries and wages - and realize that states and municipalities are going to be cutting jobs this year and the next. As soon as the Census bulge wanes, our true fiscal position will become clear.

At the end of the 1982 recession we found ourselves in a similar fix, and we resorted to a round of regressive tax increases (Social Security and Medicare tax raises) to get ourselves into a stable position. However, we had two things going for us then that are working against us now. The first was favorable demographics - the boomers were entering their prime earning years. The second was that interest rates had been high and came down, so effectively many people saw their overall purchasing power increase.

Boomers basically get full Social Security at 67, so we don't even have some of the Greek and Italian options. If you raise the retirement age further, you only get more early retirees. If you raise the early retirement age, you get more people going out on disability - and when they go out on disability they qualify for Medicare after two years, so you don't get a net gain.

Obviously we are going to move to a much more rapidly rising tax burden as net incomes increase, but there are upper limits to it. You can't add 2.9% taxes for health care reform, and then add 5% more on income taxes, and then add another 6% to fix the Social Security deficit, while the states are also raising taxes. Before long you get to the position in which persons stop paying others to do work and do it themselves, which lowers total taxes.

Next year, reality hits. It's going to be such a massive, whomping blow that the entire US establishment will be reeling.

I'm not the only one saying this. Samuelson's latest. Frezza.

Comments:
It is monday and i am exhausted.Which parts of the system still work? Maybe I am too tired,but looking at our health care,financial,judicial and education systems makes me want to pull the covers over my head.
 
How's the leg?

We'll just have to deal, Tom. We have to get serious about our problems.
 
Before long you get to the position in which persons stop paying others to do work and do it themselves, which lowers total taxes.

Yup. At this point, this is going to happen no matter what we do. 3-D printing, point-of-use energy, and inexpensive machine tools are going to decentralize a lot of the industrial value-add. Especially when combined with the usefulness of the internet for learning new skills quickly. This is partly because the technology is available, and partly because bad decisions by the Establishment have lowered the value-add of our industrial institutions (like electric utilities and manufacturing conglomerates).

If the taxman bites too hard, the value-add will simply happen "under the table".
 
Oops--meant to say 3-D printing and inexpensive machine tools = "point-of-use manufacturing".
 
Tell me what happens to interest rates?
 
MOM,

Why I Seem So Desperately Worried

We know you are desperately worried because you managed to avoid talking about oil (even though it rose 3% today). You'd only do that if you thought of something even worse to worry about. Taxes would certainly qualify. Sigh.
 
Hello
I’m one of those who lost my job at 61 and I’m collecting unemployment as long as I can and then move to SS. I’m OK with this because I have cheap rent and have no other payments other than what’s normal but I’m one very few in this position. Yes, I’m going to do as much as I can this year in the way of cheap fun because it won’t be fun in 2011.
Sad with what corp. Amerika has done to this nations citizens since we were the ones that made it possible for them in the first place to become as big as they have come. I don’t expect any help from congress because as you pointed yesterday there is only a few with a brain there and the rest are corp. lackeys. I saw were there was an increase in consumer spending, was this because corp. spent more on lobbyist this quarter? Corp. are citizens now.
jo6pac
 
MoM the leg is nearly healed but my energy level has not recovered yet.
 
Jo6pac - well, what else can you do, and what else can most of the others in your situation do?

The unemployment is high in most places, but where it is really high, people can't even get a part-time job at Walmart or a fast-food place.

It's not so much corporate America as it is everything together. I do think the big financials and banks are miscreants. But most companies are pretty much aimed at survival. Admittedly, outsourcing everything is hollowing out their local sales base.
 
Tom - that antibiotic doesn't make you feel too good, and the infection doesn't help either. Take it easy.

Maybe you should stop reading this blog for a few days. And definitely don't look at the local listings.

Just think of spring and happy days.
 
CF - they are not going to do what we want them to do, that's for sure.

If we let this go too far, it will be like credit cards. Yeah, in theory the rates should be low, but in fact the risk cost is so high that's the sky's the limit.

I'm still pretty optimistic on treasuries for the next 18 months, because the worries over Europe and that humna-humnah are too big.
 
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