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Tuesday, August 03, 2010

Better Read CBO Report

CBO revised its long-term budget outlook today. Better read it. It's 90 pages, but you can go through the first two chapters and get the basics.

CBO's "alternative fiscal scenario" adjusts what the law says by what is already happening. When asked to score the health care bill, CBO has to use the provisions in the law that mandate cuts to Medicare. But Congress is not going to abide by those cuts, because physicians won't be able to treat a lot of people under the theoretical premiums. Congress has been overriding the basic law on those premiums each year, and it will continue to do so.

And then there are other theories. Anyway, CBO predicted today that US debt held by the public would reach 100% of GDP by 2023. So you'd better read it, because we have to make changes very quickly. At about 80% of GDP, borrowing costs should begin rising. Once that happens, it is hard to get out of the downward debt spiral, because spending cuts tend to be overridden by rising debt financing increases so it is very hard to reduce public debt at all. Certainly by 90% we'd be in that position.

And don't bring up Japan. Life is very rough for me about now and I might snap at you in the comments.

The difference between the US and Japan is that Japan has a positive current account balance, whereas ours is persistently negative. That means that Japan is earning extra in trade and income flows PLUS a great deal of government debt is held domestically. That means much of the interest the Japanese government pays on the debt basically goes back into its internal economy instead of being shipped overseas, and the rest offsets its current account surplus. Contrast that to the US, which has a lot of debt out internationally in order to finance our trade deficit.

These two factors have allowed Japan to keep generating more public debt without getting the Greek treatment,. So far. But now Japan is looking at attempting a program to stop growing their debt, and one of the reasons is demographic - as retirees age they will tend to eat up their savings for their retirements, plus tax receipts from the retirees are going to tend to drive revenues lower.

In any case, here is an excerpt from this CBO document, which probably should be classed as a Jurassic Park type of thriller/chiller drama (fiscally speaking):
Under the extended-baseline scenario, which reflects current law, federal spending for those programs would grow from 5.5 percent of GDP today to about 10 percent of GDP in 2035; about 6 percent of GDP would be devoted to Medicare, and about 4 percent would be spent on Medicaid, CHIP, and the exchange subsidies. For the alternative fiscal scenario, CBO assumes that several policies designed to restrain federal spending on health care would not be continued. As a result, mandatory federal spending on health care programs would grow faster, reaching about 11 percent of GDP by 2035. Medicare spending would grow to about 7 percent of GDP, and federal spending on Medicaid, CHIP, and the exchange subsidies would reach about 4 percent of GDP.
Of course that doesn't account for Social Security:
According to CBO’s projections, the number of people age 65 or older will increase by 90 percent between now and 2035, compared with an increase of just 12 percent over that period in the number of people ages 20 to 64.
(Right here the astute reader dives under the blanket and grabs the popcorn - the scaly predators are closing for the kill)
CBO therefore estimates that, unless changes are made to Social Security, spending for the program will rise from 4.8 percent of GDP today to 6.2 percent by 2035.
The screaming. The running!

So 11% + 6.2% = 17.2, and historically the US has had trouble growing the economy with taxation rates over 21%, or more feasibly 19.5%. Currently Medicare/Medicaid/Social Security are about 42% of the total government budget. That's one heck of an increase. Then add servicing costs on the debt, and paying for the federal government workers.

There's nothing left to even pay the military. This is bad because these guys and gals have guns and know how to shoot. On the other hand, that will make a great reality program, won't it? Imagine the Marines vs The Critters (staffers only, actual Congresspeople will be hiding in closets.) Gee, I wonder who will win?

Anyway, in Chapter 4 CBO shows its lack of faith in the theory that revenues can be raised much above historical rates and actually produce more revenue, commenting:
As a result, revenues as a share of GDP after 2020 are roughly 1 percentage point higher under the alternative fiscal scenario than the average share observed over the past 40 years. Revenues as a share of GDP have moved above or below that average between 1970 and 2010 but typically return to somewhere near the average, suggesting that changes in policy have offset other aspects of the tax system that otherwise would have tended to increase the revenue share over time. In the alternative fiscal scenario, CBO assumed that those sorts of policy changes would continue. Revenues as a share of GDP would increase from 15 percent of GDP in 2010 to just over 19 percent in 2020 and would remain constant at about 19 percent of GDP thereafter.
This leaves one heck of a revenue gap:
As always, click on this little guy to view a larger graph (or right click and open it in another tab or window). It's not cuter up close. This graphs shows what CBO cynically expects revenues as a percent of GDP to be.

So basically we've got flat nothing to take care of welfare, food stamps, Congress Critters, farmers, windmill subsidies, corn ethanol subsidies, reckless bankers, student loans, the military, education, infrastructure, etc, etc, etc.

Translation: It's the demographics, stupid. Earlier CBO calculated that the average near-future retiree is going to be getting benefits of just 16.5K a year, which is why I harp on "Save, save, save." Cutting benefits is not all that feasible, is it? And the later boomers are all going to get that 16.5K only if they wait until 67 to retire, so good luck ratcheting that up.

And we already have a real problem with "retirees" pushing younger people out of entry-level jobs. If you think your son or daughter is going to be able to get a job when the 69 year olds are out there scratching for a living in the dirt, think again. For one thing, the retirees are mostly going on federal medical programs, so they are going to be much cheaper employees under the new health care rules, won't they?

Raising the retirement age has other implications. Most people in private industry are kind of dumped in an undignified fashion by 62. They can then live off savings, 401Ks and part-time or low wage jobs until 64 at least, which kind of gets them there as long as they don't have a lot of debt. But 70? BWAHAHAHAHAHAAAA. Not very likely.

It might amuse you to consider that most the theoretical "savings" from retirement age changes would really be eaten up by welfare, disability claimants, food stamps and the like. Many of these people will be tapping the social safety net for a few years to bridge to Social Security payments. There is another factor - as things now work, although disability rates rise sharply in the later years, most times early retirees have a partner to take care of them. If that partner is out working, then those people will increasingly be provided home or nursing-home care at the public expense. So don't think there is some magic bullet here - we still age, get sick and die.

It's amazing how many people are hell-bent on finding the headwaters of s--- creek and takiung the rest of us with them. Either they can't smell, or they don't know that if it stinks you should get out of it.
Most people in private industry are kind of dumped in an undignified fashion by 62. They can then live off savings, 401Ks and part-time or low wage jobs until 64 at least, which kind of gets them there as long as they don't have a lot of debt. But 70?

M_O_M, that right there is the core of the problem. The Baby Boomers simply cannot retire until sometime after age 70, but our social and legal infrastructure makes it difficult for these folks to keep producing at anything near their potential output.

Personally I'm guessing that the Boomers will simply force society to change in this regard, as they have changed our assumptions about every other phase of life they've gone through. The "youth culture", "yuppies", "soccer moms", and soon geezerhood.
When you don't post, I get depressed because my hitting refresh brings me no new MOM. When you do post I get depressed because, well, you post depressing stuff.

I almost wish I had never found your blog, but I can't quit you. Glad your back.
We've got to stop being the world's policeman and
the world's consumer. Time for tariffs, tax law changes, and a lower standard of living.

The health care reform should help to move average life expectancy back down below the average retirement age. That was probably the plan all along.
When enormously complex dynamic systems are stressed enough they can fail in many different ways,very suddenly. All of us can come up with low and medium probability events that could be the "trigger" the only certainty is that there will be one. Good luck to all here and especially MoM and her family
The Japanese solution is exactly what we need: Gojira walks out of Chesapeake Bay and up the Potomac, redesigning the national government with radioactive fire.
The Optimist - Are you absolutely SURE that your screen name is well chosen?

Attractive as the Gojira solution may seem, I have spent a large amount of time in banks with major problems. I have seen banks experience every sort of problem from losing massive amounts on bad loans to literally losing track of their cash flows - THE ULTIMATE SIN.

And still, I have never seen Gojira. So I am reluctantly forced to conclude that Gojira lies in the realm of such fables as "Real estate always goes up."

But thank you for the laugh.
Tom - indeed. If we keep loading more and more stress on, the only certainty is that the system will collapse.

Peggy and Neil - One of the problems we are facing is that many of the proposed solutions to the problem are just as glib and fallacious as those who pretend that the problem does not exist.

In other words, if we refuse to make a place for the older in our society, then in essence we will have to terminate many social safety net programs and the young will also suffer both from jobs lost to the older workers and from the lack of the basic social safety net we have provided since WWII.

Thus the proposed "war between the young and the old" is an illusion. Also the war between the liberals and conservatives is an illusion.

What's not an illusion is the war between the those who believe in fables and those who want to suck in their guts, get in there and see what we can save out of this. Unfortunately, that group now appears to be a minority in both political parties.

As Sporkfed points out, the real issue is adjusting to a lower standard of living overall, and the question of how we can best mitigate that.

If we dump disability for the old folks, we dump it for the young folks. Instead, we will have to dump many social programs that favor people who are not in acute need in order to maintain a minimally decent standard for those who are in acute need.
I thought the US Govt. WAS Godzilla.

One thing this downturn is showing is that individuals can turn on a dime if they have to, when their feet were near the dragon's breath they turned and ran - they started deleveraging. Meanwhile, large banks, large corporations, and large governments refuse or are simply too obese to change course and can't stand to see individuals and small business not agreeing with their direction.
So the most succinct summary would be "Hell -- meet Handbasket".

Is that about the gist?
A_Nonny_Mouse - I think the gist is that until we start facing reality it will keep kicking us in the butt, and the reality boot will just keep getting larger while our butts get sorer or sorer.

It seems to me that our politicians aren't even pretending any more that they are trying to make this work as a whole.

I think this is what is worrying the voting population.
MoM,What I am picking up from people is the realization that we do not have a representative form of Government,and that the pretense that we do has worn very thin. And a number of scapegoats are being floated out to see which one will work this time. Not good. I see that Judge Walker has affirmed that equal rights under the Law apply to marriage,that should be a useful tool for focusing people's fear and anger during campaign season. (If I weren't allergic to lanolin I would probably prefer a well groomed sheep to a guy,thankfully that is a moot question)
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