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Monday, February 14, 2011

This Will Make Us All Go Gray

Bloomberg News has an article on US public debt expense:
Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.
...
Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.
...
“People are starting to come to the conclusion that you’ve got a self-sustaining recovery going on here,” said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. “When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket.
The problem with this is that we will not be able to do much about our deficits. From now until then, spending even more money on stuff that isn't demonstrably going to produce more efficiencies will only make the impending social services cuts that much more draconian.

On a previous post, Dan left the following comment:
Fascinating discussion, especially for a liberal Democrat like myself. I think there's a case to be made for some regulation (unless we want to go back to the era of 80 hour work weeks and child labor), but I agree that we can be over-regulated. Everyone (and I mean *everyone*) sees the government as a tool to do what's best for them, rather than for the country (an unfortunate by-product of the cynicism of the Republicans since the 1980s as well as actual failings of government).

What's striking to me is that some people in this thread seem to think that we can race to the bottom--if we only cut taxes and make business less regulated, we'll revive our manufacturing. Not happening, folks. Any amount of taxes we cut, the Chinese (or Vietnamese, etc, etc) can cut by half again. Plus, I think that Americans are wealthy enough to not want those 'dirty' industries mentioned. And guess what? When a country gets rich enough, the citizens tend to make that decision.

We need to compete based on our comparative advantage--agricultural wealth, innovative society, wealthy consumers, educated workforce, legal structure, and large domestic economy. I don't know how to do that best, but I do know that the government has incentive to improve these comparative advantages, as opposed to (largish) companies, which have very little incentive to care about locality.

I guess it's a matter of trust. I dislike trusting either big business or big government, but if I have to pick one, I'd say government--at least you can vote the bastards out.

And then, I guess the answer always comes back to politicians--I wish we had a smaller republic where politicians would be more responsive.
There is a lot here most can sympathize with. Politicians do not seem to be very responsive to our most pressing problems. Dan is certainly right that most people are asking the government to operate in their own interests, without regard to whether it would be sustainable over the long run and whether it would hurt others severely.

But some of this.... Dan thinks government has an incentive to improve local conditions, and that it will invest our money more wisely than corporations. But as far as I can see, much of our current proposals amount to giving large amounts of our money to these corporations which Dan does not trust. There's a contradiction here. Nor has much of the "giving-money-to-corporations" initiative worked; all that money given to solar has just been shipped overseas. The problem is that if corporations can't make money doing it, the government can't make money doing it either.

The worse fallacy we currently aren't facing is how close to the line of irreversibility we have come.

According to the Treasury prediction, net interest on publicly held debt will rise to about 550 billion in 2016. Just to show how serious that number is, here are some details on US fiscal year receipts all expressed in billions and trillions. 550 billion is .55 trillion, compared to 185 billion or .19 trillion in 2010. The difference is .36 trillion or 360 billion.
2010 (data here, go to page 6):
Net individual income tax receipts: 899 billion or .89 trillion (decay)
Net corporate income tax receipts: 191 billion or .19 trillion (improvement!)
Net social ins/retirement receipts: 865 billion or .86 trillion. (decay)
Total: 1.94 trillion

2009 (same link):
Net individual income tax receipts: 915 billion or .91 trillion
Net corporate income tax receipts: 138 billion or .14 trillion
Net social ins/retirement receipts: 849 billion or .85 trillion
Total: 1.9 trillion

2008 (data here, go to page 6)
Net individual income tax receipts: 1,146 billion or 1.15 trillion.
Net corporate income tax receipts: 304 billion or .30 trillion
Net social ins/retirement receipts: 900 billion or .9 trillion
Total: 2.35 trillion.
Now we come to the expenditure side. For now, let's just concentrate on Social Security and CMS (government medical). You can find the medical data on page 10 and page 16 for SS for the above links:
2008:
CMS expenditures: 862.6 billion, or .86 trillion.
SSI, Disability and Retirement: 658 billion or .66 trillion
Total: 1.52 trillion

2010:
CMS expenditures: 1,036 billion, or 1.04 trillion.
SSI, Disability and Retirement: 754 billion, or .75 trillion.
Total: 1.79 trillion
So, even assuming that by 2015 taxes have rebounded far past the peak level of 2008 (let's say 2.6 trillion, which we are in fact unlikely to achieve), it is clear that the pace of growth for Medicare, Medicaid, and Social Security will race past tax receipts. ( I will pretend that we did not pass health care reform, which is a huge new entitlement program.) CMS expenditures will start rising very rapidly after this year, because each year a large new cohort of retirees will reach 65 and go onto Medicare. In just two years, spending on these two programs rose from 1.52 trillion to 1.79 trillion. The rate of growth is due to increase, but let's pretend that spending will only increase by .30 trillion each two years.

By 2016, we will be spending over 2.6 trillion on these programs - which is definitely more than revenue from the three main revenue streams. Note that this was not true even of 2010. Add the .36 trillion for the additional interest, and you come up with 2.95 trillion in 2016 spending for interest on the debt, government medical and retirement. US corporate tax rates are already about the highest in the world. So forget that. You would have to raise income tax rates so high to cover just the interim needs that it would cause a second downturn. The problem is the ratio of wage earners to retirees; we can only make this up by charging much higher rates on investment income, but that is essentially a direct cost levied on capital.

So the 2016 split looks very negative. Dan commented on trust. The fiscal realities are so brutal that I think trust in government will continue to decline. Even this year Pelosi was lying to Democratic voters (no one else believed her) about Social Security.

We now have to cut Social Security and massively cut Medicare. There is no option. And we have to do it before 2020.

We have to raise (and we have already raised some) taxes on investment income.

Our government has lied to us, and the lies are inflicting a brutal awakening upon the American public.

In terms of trust, the GOP will gain more and more, because GOP leaders have been much less culpable in maintaining the illusion, although they certainly haven't delivered legislative solutions when they had the chance to do so. But Congress, as an institution, will only become less and less credible until the current crop of leaders are out and a new crop is in. This may account for the brawling-over-the-last-public-dollar syndrome we see demonstrated in current politics. If everyone knows we're lying, everyone wants to make sure that they are not first in line for the axe.

To regain trust, we at least have to start legislating in the broader public interest, but until we do, trust in government will keep collapsing.

The problem with the health care reform act is not whether it is constitutional or not. It is that it was never fiscally possible, and it will not be the law of the land in 2018 simply because we cannot afford to pay for it.

Comments:
I dislike trusting either big business or big government, but if I have to pick one, I'd say government--at least you can vote the bastards out.

What the...?

With big government, voting the bastards out takes a long time and is usually futile. And when you DO vote the bastards out, undoing what they did while they were in office rarely happens. And most of the agencies are so entrenched they are essentially answerable to no one. Can you vote out bad decisions of the EPA, FCC, FDA, etc.?

With big business, I can often choose NOT to do business with them. Yeah, it's hard to live a "big business"-free life, but it is impossible to live a "big government"-free life. Ask any small business owner.
 
Another thing that puzzles me is the liberal hatred of "tea partiers".

I understand the political views of tea partiers are in most instances the exact opposite of liberals, but in the larger scheme of things the tea partiers are a dissatisfied faction of the GOP. We're seeing enough of a split that we are seeing the beginnings of the demise of a two-party system. It may never completely happen, and in and of itself won't cure any ills, but it's a least forcing the GOP to actually take representative government seriously.

The Democratic Party needs the same wake up call; their constituents want better local bus service, responsive community policing, and an end to the foreign wars and instead have been given high speed rail, solar initiatives, and a health insurance mandate. A lot of Democrats I know are disillusioned with Obama - they thought he was one of them but he turned out to be just another limousine liberal. But I don't see the same split happening in that party, yet.
 
the VAT tax is coming
 
The reality is that far more then a cut in SS or Medicare is required to save the county from fiscal ruin. Cutting Military adventures,security spending,drug wars, commerce dept,special interest tax dodges, education dept, energy dept, all come quickly to mind and these are just the frosty headliners with billions more waiting to be sliced. The ending of outsourcing manufacturing and jobs as trade policy and the realization that we have created our economy on the largest energy footprint in the world but the energy cost trend is heading away from cheap available supplies towards more expensive and rarer.
 
If the VAT replaces business income taxes, it will be a good thing. Not great, since it's a paperwork nightmare, but good. If you toss out the retained earnings tax (can you think of one more unjust or counterproductive?) you can probably throw away depreciation and expensing, too.

Its big strengths are three: first, it can be (and should be, MUST be) applied to imports (to level the playing field for domestic producers), second, everybody pays the same and every consumer can be convinced, eventually, that HE (and not the business) is paying that 22%, and third, that it does not protect the less efficient business and delay "creative destruction" the way a graduated tax must.
 
From Barron's:

http://online.barrons.com/article/SB122065354946305325.html#articleTabs_panel_article%3D1

"Only price will slow the use of oil; the rising price tells us we don't have enough. So, we are now beginning a bitter, bitter competition for fuels that will see the price rise to ridiculous levels." – Charles Maxwell

Maxwell has worked since 1999 as senior energy analyst at Weeden & Co., an institutional brokerage firm in Greenwich, Conn., having started as an energy securities analyst in 1968. Oil prices came down last week, trading at around $108 a barrel, but he predicts an eventual sharp move upward -- to around $300 a barrel -- owing to a lack of available supply."
 
Ron-

I more or less agree with your comment, until the last bit:

the energy cost trend is heading away from cheap available supplies towards more expensive and rarer.

Given current technology, we're headed toward expensive and ubiquitous, not expensive and rare. Fracking, oil shales/sands, solar, wind, roughly listed from least to most expensive. All these are relatively expensive ways to concentrate energy that is widely distributed in useable quantities. Add in lots of nuclear, and I can envision an energy economy based on current technology that would be roughly economically equivalent to what we have now. It will take another round of technology advances to get cheap and abundant energy.
 
Ron - and Maxwell was so right in 2008.

I think the same forces are in play today.
 
Unless I missed it, the Bloomberg piece never says what **interest rates** are being assumed for 2015...yet they specify very precisely that the net interest cost will be $554 billion.

A great example of false precision.
 
This might be a bit off topic... I saw this on Ace of Spades and wanted to pass the tidbit on.


Apparantly federal agencies have lots of cash in holding accounts that have been there for many years. Why does this sound too good to be true? Anyone know anything about this?

http://www.nationalreview.com/articles/259528/federal-government-s-unspent-billions-deroy-murdock

Reminds me of the bank account that one spouse will keep secret from another spouse. I suppose if this is true that at least they are not handing out the cash to their cronies.

My verification word is "hiested". Wow.
 
Why a VAT and not tariffs ? Considering the trade
deficit, I don't see how tariffs hurt more than they
help. No intrusive burden on manufacturing here.
just at the point of entry for goods made overseas.
Sporkfed
 
Army Mom - that is true. In a lot of cases, the agency may not have authority to spend it. It usually occurs as a hangover from spending programs, and given the great American Stimulus, I bet we are at record numbers.
 
MOM -

You neglect one obvious area of cuts - eliminate the earned income tax credit. Put the 10s of millions of people back into the income tax system, who currently have all their income tax returned to them and they will soon switch from voting for bennies, disbursed from the public purse, to voting against bennies.

People's voting patterns depend on whether they are paying for these government programs, or somewone else is. It's that simple.

It is morally wrong that people with middle class incomes pay no income taxes, because they chose to have children. You might say, some middle class income earners have no children, so that other middle class income earners can have children, at others expense. It's wrong.
 
I'm not ignoring you folks. I'm reading the President's budget.

As for earned income tax credits, there is extra funding in there to increase the credit for those with large families.

I have to admit, my eyebrows raised at that.
 
Increased EIC for large families? That's an interesting take, for a Progressive president.

Children are the health of the state, contra Bourne. Perhaps the importance of the worker/retiree ratio finally sank in. It's a little late to change it with incentives, though.
 
Yes, Neil, that was my take, too. If we are not getting enough Social Security and Medicare revenue, then create more revenue by getting more people to pay into the systems. There is a bit of a lag with that approach, though.
 
If we are not getting enough Social Security and Medicare revenue, then create more revenue by getting more people to pay into the systems.

Structural unemployment negates that strategy.
 
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