Forgotten Debt

The magician employs sleight of hand by having you fixate on something highly observable while he or she completes the trick with the other less visible hand. The audience oohs and aahs as they are sucked into thinking that something impossible has happened.

Today our government intrigues us with spies and improbable alliances with nasty dictators while they destroy our nation with behind-the-scenes budgetary policies that likely will bleed us ounce by ounce. The sleight of hand lets them spend more and more as they pretend to give us tax breaks and other goodies. Few speak out because frankly, the topic of budgets pretty much puts most of us to sleep or has us heading to the closest bottle of JD.

The data reveal a clear path to ruin but alas there are few in the press or anywhere who want to press the case. It seems to be a lot more fun to watch our key federal institutions lob daily bombs at each other. In fairness, there is a group that seems dedicated to warning about the national debt called the Committee for a Responsible Budget. You can find them on Google easily. Today, I share some data I found at cbo.gov – the Congressional Budget Office. I look at historical budget data and then their 10-year budget projections. It’s not a pretty picture but you would never know it if you read the daily Bloomington Herald Times or watch Fox Business News (or anything else).

Federal government spending came in at $3.98 trillion in fiscal year 2017. That amount was more than twice the number recorded for spending in 2001 ($1.86 trillion). While spending always rises during a recession (2008-9), the 2017 number is about a half trillion dollars higher than it was after the recession in 2010 ($3.46 trillion). Now for the future: the CBO projects that without any major changes in spending legislation, federal government spending will rise to $6.62 trillion in 2027. That’s an increase of about $2.6 trillion in 10 years.

Luckily, we got tax cuts so all is fine. Ha ha. Federal tax revenues rose from $2.16 trillion in 2010 to $3.32 trillion in 2017. CBO predicts revenues will rise to $5.30 trillion in 2027. Tax cut? I don’t think so. In the next 10 years, our taxes will increase by about $2 trillion.

You're on a budget, right? The budget is motivated by the difference between your spending and income. If you are like the federal government and you spend more than you earn, then you use the plastic. In government, the annual plastic usage is called the deficit. The total amount you owe is called your debt – the total amount the government owes is called the national debt. 

The government deficit in the year right before the recession was $248 billion. In 2017 it was $665 billion. The CBO says it will increase through 2027 when it will hit $1.3 trillion. Yup, in that one year the difference between government spending and revenue will be more than $1 trillion. Yup, in that one year we will spend $1.3 trillion more than we collect in tax revenues. Meanwhile, the national debt will rise from $9 trillion in 2010 to $14.7 trillion in 2017 and to $27.1 trillion in 2027. Can you imagine getting a statement form Visa saying you now owe $27.1 trillion dollars?

Another way to present this data is to compare these figures to GDP. That approach removes the impacts of inflation and shows the relative importance of these numbers to the size of the economy. The below table shows:

• Tax revenues as a share of the economy declined right after the recession but will climb as a percent of the economy through 2027
• Government spending increased during the recession and went back to something more normal, but recent legislation has spending rising as a share of the economy through 2027.
• The deficit ballooned in the recession but was already falling by 2017. It will rise again through 2027.
• The national debt increased in the recession and thereafter doubled as a share of the economy to 76.5% in 2017. Good times usually imply smaller deficits and lower debt. But in the case of the USA today, we see the national debt rising to almost 100% of the economy in 2027 – almost three times what it averaged right before the recession.

Is this a crisis? Not yet. But with our current tendencies in government today and the almost total lack of interest in approaching a 100% debt to GDP ratio, it is likely that these numbers will worsen.

Combining the government’s debt with student debt, credit card debt, auto debt, and a few others – the US could easily see itself in a debt crisis. The economy is strong today and that helps. But we have not seen a recession in a long time. When it comes the world’s investors may wonder if America is really a good place to stash their money.

We might want to think about ways to reduce that debt before the fit hits the Shan.

Government Budget Figures as a Percent of GDP (in percent)

                          2007    2010    2017   2027*

Tax Revenue      17.9     14.6     17.3    18.5

Spending            19.1     23.4     20.8    23.1

Deficit                 -1.1     -8.7      -3.5     -4.6

Debt**               35.2     60.9     76.5     94.5

* This is a projection assuming there are no changes made to the laws on government spending and taxing. Of course any new laws that change spending or reduce taxes would alter budgets in 2027.
**The debt quoted here is what’s called debt held by the public. This is what the government has borrowed and owes to private investors (domestic and foreign) and the Federal Reserve.

Hyperinflation in Higher Education

This week I decided to follow up on a graph I saw in the Wall Street Journal that compared college tuition and out-of-pocket costs to the costs of medical care and overall living costs. See the graph at the bottom. All I can say is, Wow. The red line in the chart goes from the year 2000 to 2016. It shows that costs of higher education increased by just short of 150%. Imagine if your waistline increased by 150%. 

We all complain about the rising costs of medical care. It is the yellow line in the chart, and it rose by about 75% over those same years. Apparently a nice course in the liberal arts is worth a lot more than a course in biology. Okay that's a distortion, but what the graph says is that the costs of college education went up twice as fast as medical care costs from 2000 to 2016. And then there is all that other stuff you buy -- all those silly aged steaks, lovely cars, and ovens. The overall Consumer Price Index increased by under 50%. 

It is pretty clear from the pretty graph that higher ed spending is the winner. As a former professor, I resent that. Where was all that money when I was sweating it out in my office without electricity and running water? 

Mean conservatives have looked at all this and have come to some conclusions. They see a connection between the ease of getting loans for college, tax benefits, and the expansion of grants and scholarships. Some of these big meanies are proposing a crazy thing. Maybe if the government quit favoring higher ed so much, the price might not go up another 150% in the next years. Crazy idea, eh?

But Junior has to go to school, right? School? Are you kidding? Don't scream at me but I remember what it was like to go to school. Jim and I roomed together for three years in what might now be considered a Georgia prison. Back in those olden days there was no student union, there was not even an espresso maker or a StairMaster in our dorm's break room. Basically there was nothing in the break room except for a couch. No TV. No beer. No JD. No computer games. The entire floor of our dorm shared one pay telephone and one bathroom. We had to pass 18 hours per quarter to graduate in four years and therefore the lack of almost all amenities was necessary since we actually had to study. Study, really?

Today, universities are not spending the money on the faculty -- or at least not on most of them. In fact, the new wave in higher ed is to minimize the use of regular tenure-track faculty. But they do seem to have plenty of money for planting and replanting all the flower beds each season and for building walls, monuments, and other things of architectural beauty. We have more trees on the IU campus than Redwood Park. We build new academic and other campus buildings faster than the NFL can build domed stadiums. Clearly we want the alumni to be comfy when they go to sporting events and we want helicopter parents to enjoy their spring strolls around campus when they come to harass their lovely children's professors. We build luxurious dorms faster than Starbuck's builds coffee shops. Why would a student want to graduate if she could stay in these palaces located within meters of favorite student watering holes?

The kids do not get jobs and the ones who run out of courses to take leave campus and move in with their parents. Meanwhile, the nation has a shortage of plumbers and programmers. Luckily many of these unemployed students are excellent at creativity activities and learning how to discover themselves as they go on their graduation trips to Luxembourg. 

Sorry folks, but this old codger does not like this brand of change. I'd rather see our country surging ahead as a model of innovation and technological progress. I'd like to see adults worrying less about the creature comforts of their kids and helping them better understand the values of things like history, economics, accounting, hard work, patience, and so on. Removing some of the government support might lead to more demanding consumers who require that universities get back to doing what they should be doing. In the meantime, if college is too expensive, young people might try going to a local community college where they might learn something and also gain a marketable skill. They can go to Luxembourg later on their own own dimes. 

1969 Was a Good Year

I wanted to compare some data and found a nice series for government spending going back to 1969. Not sure why they started the data in 1969, but they did. So I started thinking about what things were like about 50 years ago.

I started with my favorite subject, me. I finished my BS in Industrial Management at Georgia Tech in June of 1968 and to escape the draft, I started an MS program there. Strangely enough, the draft was not impressed by my love of Industrial Management, so they sent me a draft notice in late 1968. They let me finish two quarters of my new program and asked me to report for basic training in March of 1969. So in 1969 I was about 23 years old and was spending time training in Texas and Colorado. I finally settled into an Air Force base in Tucson, Arizona. I was an Airman First Class. I had one stripe. I think I made less than $100 per month.

On that salary I was lucky that a stamp cost 6 cents and a gallon of gas was about 35 cents, which made it economical to drive down to Nogales, Mexico to buy rum. A dozen eggs was 62 cents. For real people who could think about such things because they had a median income of about $8,300, a car cost about $2,000 and a decent house ran $30,000.

I was fully employed in the USAF in 1969. The national unemployment rate was 3.5%. A recession started in December 1969 so the unemployment rate started rising in 1970. The inflation rate was 4.5% in 1969. I could remind you of more – but that’s probably enough for the purposes today.

My main purpose is to look at how we spend the government’s money today compared to 1969. The table below shows 1969 spending in billions of dollars and as a percent of total government spending. 

                                          BIL$      %ofTotal

       Total Government      183.6          100

       Total Mandatory          53.6            29

       Social Security            26.7            15

       Medicare                       6.3              3

       Medicaid                       2.3              1

Our beginning situation finds government spending of about $184 billion in 1969. What we refer to as Mandatory Spending comprised a little more than a quarter of that total spending. Social Security spending was responsible for most of that – and amounted to 15% of total government spending. Medicare and Medicaid were toddlers in monetary terms – accounting for about 4% of all government spending in 1969.

A lot of water has passed under the bridge since then. For example, my forehead has grown several thousand percent since I was 23, and my time in a 10K race might have tripled. In basic training we had to run a mile in less than 6 minutes with combat boots on. I am not kidding. Anyway, let’s look at our government in 2016.

                                          BIL$     %ofTotal

      Total Government       3,853          100

      Total Mandatory         2,428            63

      Social Security              910            24

      Medicare                       693            18

      Medicaid                       368            10

As you might expect, if all the things we buy went up in price then government spending would do the same, and it did. Government spending went from $184 billion to $3,853 billion. That’s an increase of 21 times. Notice that if median income had gone up 21 times, it would now be about $174,000. So let’s give a big cheer for government growth. Way to go, government.

The above table shows that total Mandatory Spending went from being 29% of total government spending to 63% in 2016. That means – tada – that Mandatory Spending went up a lot faster than overall government. Mandatory Spending went up 45 times in 47 years! If median income had gone up that much, the median person today would be making $374,000 per year. You guys all make that amount, right?

You smarty-pants are starting to get my drift. Now let’s look at Social Security, Medicare, and Medicaid. To cut to the chase, Social Security went up 34 times; Medicare by 110 times; Medicaid by 160 times. These three programs have gone from being 19% of all government spending to 52% of it. Or put another way, all the other things the government spends on went from being 81% of the budget to 48%.

I know I harp on this point a lot. But the baby boom generation is just getting started. We were born from 1946 to 1964. Those born in 1964 are mere babies in their fifties. If we don’t focus more on how we spend money on the old folks, then the rest of you are going to have to live on a lot less. Maybe you should think about it a little more. In case you are interested, if median income had gone up by the same number of times as Medicaid (160 times) we'd each be making about $1.3 million a year. Sweet. 

US Leading in Government Deficits

Two weeks ago, I wrote a post about US national debt and deficits and concluded that past governments have put our country in a very tough place with few good options that could restore economic growth. Some friends wondered whether the US is alone is this distinction. So I found some IMF data to compare the US against other key countries.

The first line in the table below gives you US information. After averaging annual government deficits of 3.5% of GDP from 1999 to 2008, the deficit is now 4% in 2017. Thus the deficit is now worse. We had deficits in all 7 years since 2011 with the highest deficit in 2011 of 9.6%.

In all these categories, the US was worse than the EU and the other comparison countries. While all these countries are habitual debtors, Canada was slightly better since it had a surplus in one of those seven years. Germany had only two deficits in those seven years. Wunderbar!

When it comes to 2017, the US and Japan were tied with deficits of about 4% of GDP. Germany posted a surplus in that year of 0.6% of GDP. The UK, Canada, Italy, and the EU had deficits that were smaller (better) than 3% of GDP. The difference between 3% and 4% might seem small but remember we are taking these numbers as a percentage of GDP, which is $15 trillion in the USA. Also keep in mind that four is 33% higher (worse) than three. I next looked at a table with similar data for emerging markets and found that even this comparison is not good for the US. China, Russia, Mexico, Turkey and Romania among many others all had smaller (better) deficits than the US in 2017. Of course the US beat Brazil and Venezuela, Pakistan, and India. Way to go team!

The US stood out from the pack in having recorded the highest one-year budget deficit between 2011 and 2017. Japan came close with 9.1% and the UK's was 7.7%. The rest were virtually half or less than half of the US budget deficit.

Conclusion: the US tends to have larger deficits than other comparable world leaders -- both before the recession and after. We not only have larger persistent deficits but we also juice them higher when faced with a major recession. Apparently government deficits are our drug of choice.

I then found another table that compared the US to 39 other advanced nations. In 2017, there was not one single country with a budget deficit larger than the US deficit of 4% of GDP. There were 10 countries in 2017 that had surpluses: the Netherlands, Luxembourg, Latvia, South Korea, Macao, Iceland, Singapore, Hong Kong, Norway, and New Zealand. These countries typically have budget surpluses.

The US has a deficit problem whether we compare the numbers in dollars, in percent of GDP, in one year or over many. It is clear from looking at 40 major industrial countries that such behavior is neither typical nor desirable. We are hooked on the government spending drug. I think we need an AA meeting.

Budget Data for Selected Countries and Regions
Source: International Monetary Fund, World Economic Outlook, April 2017, Table A8.
Key:
2017: Budget position in 2017. Minus indicates deficit.
Fiscal Year 2017 ends September 30, 2017
99 to 08: the average budget position from 1999 to 2008
Change: Change from that average to 2017
# Defs 11 to17: How many deficits from 2011 to 2017
Highest 11 to 17: Highest annual deficit from 2011 to 2017

	2017	99 to 08	Change	# Defs	Highest
				11 to 17	11 to 17
US	-4.0	-3.5	Worse	7	-9.6
EU	-1.5	-2.0	Better	7	-4.2
Germany	0.6	-2.1	Better	2	-1.0
France	-3.2	-2.6	Worse	7	-5.1
Italy	-2.4	-2.9	Better	7	-3.7
Japan	-4.0	-5.5	Better	7	-9.1
UK	-2.8	-1.9	Worse	7	-7.7
Canada	-2.4	1.1	Worse	6	-3.3

Mr. Tuna Goes to Washington

With healthcare and tax reform in reverse and the debt ceiling sagging, I thought it might be fun to create some perspective. This will seem silly compared to all the serious things politicians say to us but sometimes it may be helpful to step back and see the essence of the situation – the proverbial bull in the china shop.

Imagine the Tuna sitting in his ill-fitting Walmart suit at the Sixth National Bank of North Avenue. He is more nervous than usual waiting for the Vice President of Horrible Loans to arrive. Tuna has a large roll of toilet paper next to him on which he has written down all his past debts, current income, and expenses. He also has a good luck charm from his glory days of tackling swift runners like the Kilt.

Luckily, the VP is in a good mood and offers the Tuna a bowl of Starbuck’s finest blend and then the fun begins. How much debt do you have, Mr. Tuna? Please call me Charlie the Tuna. Okay, Mr. Charlie the Tuna, how much debt do you owe? A ton, sir. In US dollars, I owe about a million give or take a grouper or two. Wow – that’s a lot of debt. I see you are retired, how much do you earn, including Social Security benefits each year? Together the missus and I earn about $60,000 per year. Hmm, says the VP. How much do you spend each year? Well sir, we are quite frugal in our household. We try to not spend more than $100,000 per year, if you count Mrs. Tuna’s weekly mani-pedi.

Why are you here today, Mr Charlie the Tuna? Well, we need to buy some of that long-term healthcare stuff, and we also want to buy an Airstream travel trailer. So we are going to need another $300,000. Tuna is quite confident that he has answered all the VP’s question and is beaming with pride.

So let me summarize, says the VP. You owe a million now. You spend $40,000 more each year than you earn, and you now want to borrow another $300,000. Yup, that’s about it. Tuna is very optimistic that the both of them understand the situation perfectly.

Then the VP asks another series of questions. Is it possible that you could spend a little less money each year? For example, could you cut back on large rib-eye steaks? Or maybe end your subscription to Hustler Magazine, or maybe even not subscribe to HBO? Or maybe you could get a paper route to earn more money? Tuna is confused. All those things sound crazy. Cut back on large rib-eyes? Reduce his porn intake? Work more? Geez, the next thing the VP might ask him to do is run a mile in short pants.The Tuna stands up and tells that VP a thing or two. Surely there are other banks that would treat him more fairly.

Okay, I had an extra JD with my bagel this morning. But I swear to you that this silly little tuna tale is exactly what is going on (in sophisticated language) in Washington, DC. The Congressional Budget Office projects government spending, revenues, and debt from 2017 through 2027. These numbers are based on past legislation. National debt held by the public will rise from $15 trillion to $25 trillion – or from 78% of GDP to 89% in 2027. The 78% today is the largest since World War II. So debt is basically huge today and promises to get much bigger even before we factor in proposed changes in infrastructure spending, tax reform, military spending, and so on. 

Government spending is also expected to grow – from about $4 trillion this year to $6.5 trillion in 2026. Taxes will also be rising but not fast enough. The federal government deficit will be about $600 billion in 2017 and without any new legislation will grow until it reaches $1.4 trillion in 2027. That means for every year between 2017 and 2027, yearly deficits will be somewhere between $600 billion and $1.4 trillion. That adds up!

These numbers are no better than the Tuna’s mythical situation above. This country is an economic train wreck. No wonder the economy is stuck in low gear. Our politicians put us in a no-win situation. If they raise taxes or reduce spending, we know that will have negative impacts that are nearly impossible to tolerate in this political climate. If they allow the debt numbers to rise even more, we could be the next Puerto Rico, and I don’t mean anything about rum.

That’s just the macro situation – it gets even uglier when we drill down to specifics. Senator A wants to spend more – not less – on defense. Senator B wants German Shepherds to have free health care. He won’t take a nickel away from any social program. Senator C says he loves old people and won’t threaten their ability to afford Mediterranean cruises nor will he touch spending on Medicare or Social Security. Senator D wants to reduce tax rates, and Senator E has a crush on Nancy Pelosi.

What’s the point of my rant? The harm has already been done, and our government officials do not recognize what is clear to many workers and business managers. Potential workers are staying out of the economic system. Firms are not investing in capital. The economy lags. Politicians give us technical crapola to divert our eyes and ears from what is real. What is real is that we are between a rock and a hard place, and the only salvation comes in ways that demand a first step backward. Someone is going to have to give up something. Few politicians will admit the truth because they fear they will lose their jobs. I don’t see any leaders out there. It will get worse before it gets better.

Merry Christmas from the Grinch. 

BTW. Charlie the Tuna didn't get the loan and decided to un-retire and run for the US Congress and swim with the big spenders.

Can We Kick the Budget Can down the Road Again?

We've kicked the can down the road so many times, we have a sore foot. This month our friends in the Federal government will create another ring in their circus called shutting down the government. It will be a colorful display of clowns before they get all serious and make another short-term compromise that will get us through the end of October. I'll drink a JD to that! Cheers.

The can-kicking has put us in one of those rock-and-hard place situations. We are used to the fact that government likes to spend more money than they raise from taxes. So each year the government borrows, and each year what the government owes to its creditors gets bigger. But a funny thing happened on the way out of the last recession -- our Federal Government Budget Deficit increased more than usual. And as a result, the US national debt has reached a size that we are not comfortable with. In terms of the size of the US economy, the net national debt is now double what it was way back in the good old days of 2008.

Put it on a personal scale. You have a large student debt. But now you want to spend the summer in Europe with your friends. Banks have your photograph in their lobbies, and you cannot borrow a penny for your business-class seat to Barcelona. Something has to give. You might have to sell your new car but you owe more than its worth. Or maybe you will need to get a part-time job. Ouch, whatever, the choices are not easy.

Republicans who want to spend more on X will scream about the stupidity of spending on Y. Democrats will decry the heartlessness of lowering spending on Y and the waste of more spending on X. Of course they could compromise on spending but it's more fun to wear a clown suit and honk horns.

As part of my therapy, I thought I might look at some numbers that compare the US to the rest of the world. Luckily, the International Monetary Fund publishes figures on government deficits and debts. In October 2016, they published a report called the World Economic Outlook where they looked at the world economy and made forecasts about the future. The table below comes from their online data appendices. The data for 2017 are forecasts made last October.

The table contains government deficit figures for selected countries. The column marked 2008 has deficits right before the great recession. The column marked Peak has data from either 2009 or 2010 depending on when the deficit was the biggest. The next column measures how much the deficit increased to the peak. Then comes the forecast deficit for each country in 2017 and how it has adjusted since 2008. Deficits are measured as a percentage of GDP for each country. Some thoughts from the table:

World investors are watching all these countries for signs of economic weakening. And with emerging market deficits rising so much, any hint of weakness anywhere has the potential to spook investors and move capital around the globe in gusts.

The US is a major country but is not exempt from investor decisions. Right now we don't look like the worst kid on the block. But if we kick the can down the road again while other countries appear to be more grown-up, then we may be amazed at how nasty those global investors can be. We won't be complaining about the value of the dollar being too high then.

Most countries had budget deficits in 2008. Most countries had deficits in that year though a number of resource-rich countries like Norway and Saudi Arabia had surpluses. The average deficit for advanced nations was -3.5%. The US was among a few with the largest deficits in 2008 with -6.7% of its GDP.

Then the great recession happened. This impacted the deficits in two ways. First, the weak economy automatically generated less tax revenues and more spending. Second, governments used expansionary policy to pump up the economy with more spending and less taxes. Notice the US had one of the largest increases from -6.7% to -13.1% of GDP.  Spain, Ireland, Russia, and a few other places managed to increase their deficits even more than the US.

The good news is that by 2017, most countries reversed their deficits. A combination of recovery from the recession and less accommodative budget policies brought deficits down. Most advanced countries will end up with deficits in 2017 that are smaller than those from 2008. The positives signs in the last column show the movements toward surpluses or larger surpluses. The average budget betterment for advanced countries amounts to almost 1% of GDP.

The more interesting and challenging part of the table relates to the developing or emerging countries. The table shows that their budgets were not quickly impacted by the great recession. But as the global contraction spread, they were increasingly affected. Emerging markets started with surpluses (0.8%) in 2007 which worsened to -3.8% within a couple of years and are expected to be -4.6% in 2017. Russia began the time with a surplus and now has a deficit. Venezuela, Saudi Arabia, and Libya each have extremely large budget deficits in 2017.

So what? While many countries have moved towards smaller annual budget deficits, the lasting impact of years of deficits is that most debt loads are larger. The US net debt load is now double what it was before the recession. Germany and Canada find themselves without increased debt burdens, but most of the other advanced countries have higher loads ranging from 30% for Italy to 140% for the UK.

	2008	Peak	Change	2017	Change
			08 to Peak		08 to 17
Advanced	-3.5	-8.7	-5.2	-2.7	0.8
USA	-6.7	-13.1	-6.4	-3.7	3
Euro Area	-2.2	-6.3	-4.1	-1.7	0.5
Germany	-0.2	-4.2	-4	0.1	0.3
France	-3.2	-7.2	-4	-3	0.2
Spain	-4.4	-11	-6.6	-3.1	1.3
Greece	-10.2	-15.2	-5	-2.7	7.5
Ireland	-7	-32.1	-25.1	-0.5	6.5
Japan	-4.1	-10.4	-6.3	-5.1	-1
UK	-4.9	-10.5	-5.6	-2.7	2.2
Norway	18.5	NA	NA	3.2	-15.3
S. Korea	1.5	NA	NA	1.1	-0.4
Canada	0.2	-4.7	-4.9	-2.3	-2.5
Emerging	0.8	-3.8	-4.6	-4.4	-5.2
Russia	4.5	-5.9	-10.4	-1.5	-6
China	0	-1.8	-1.8	-3.3	-3.3
India	-10	NA	NA	-6.6	3.4
Brazil	-1.5	-3.2	-1.7	-9.1	-7.6
Mexico	-0.8	-5	-4.2	-3	-2.2
Turkey	-2.7	-6	-3.3	-1.6	1.1
Argentina	0.2	-2.4	-2.6	-7.4	-7.6
Venezuela	-3.5	-8.7	-5.2	-26.1	-22.6
Libya	27.5	-5.3	-32.8	-43.8	-71.3
Saudi Arabia	29.8	-5.4	-35.2	-9.5	-39.3
Sub-Saharan Africa	1.3	-4.5	-5.8	-4	-5.3
Source: IMF Tables World Economic Outlook October 2016
Tables from B Appendix
file:///C:/Users/davidson/Downloads/_tblpartbpdf%20(3).pdf

The Holy Grail and Mis-Trust Funds for Social Security and Medicare

I was recently part of an interesting discussion about government debt and current debates about how to control it. One side says that we cannot touch Social Security and Medicare spending. Those programs are too politically sensitive. Another side says that it is nearly impossible to control US federal debt without cutting these two important social programs. There are, of course, many other debates about the debt but I thought I would focus on this one today: Can or should we cut future spending on Social Security or Medicare?

First a little story. Then I will get to some data.

Nolan gets a part-time job and finds it impossible to spend all the money he earns each month so he lends the residual to Jason who promises to pay him back in 14 years. Jason spends the money each month. Fourteen years later, when Nolan asks for the money back and shows Jason his spreadsheet of past contributions, Jason agrees that the spreadsheet is impressive and that in fact he now owes Nolan enough money to go to college at Georgia Tech. Unfortunately, since Jason did not invest the money or any other money, he explains to Nolan that he is out of luck. Judge Judy saw otherwise and ordered Jason to find a second job so as to pay Nolan back what he owes him.

You might expect by now that Jason is going to shoot me. But this is not about Jason or Nolan – it is about the United States of America. Despite receiving very large sums of dollars for about 80 years from people paying into the Social Security system and other so-called trust funds, the US has nothing to show for it. Our government has done nothing but spend more each year than it receives in Social Security taxes and all other taxes. As such, instead of a shovel-ready-saving account the government now has a gigantic debt. Worse yet, all the annual balances of the major trust funds are either already in the red or are headed that way (see table below). Despite some funny accounting that shows trust funds with positive balances, there is no lock box and there is no money. It's like Nolan's spreadsheet.  

The USA now has to get a second job – or find a clever way to raise our taxes to keep the parade going.

Now to the data. Source is the Congressional Budget Office

https://www.cbo.gov/about/products/budget-economic-data#3

The bottom of the table below shows projections of annual flows into and out of major US government trust funds. These projections are based on existing legislation. Notice that in four short years (2021) they will begin spending more than they take in each year. In 10 years, they will have combined deficits of almost half a trillion dollars each year hence. Notice that Social Security and Medicare explain all of the problem with trust funds -- with Social Security going into deficit by 2019. Medicare is already showing annual deficits. And yes, these deficits must be paid out of the general budget each year. That means more debt.  

The table also shows that the national debt held by the public (the gross debt is even larger) is going to increase by $3.5 trillion or 25% in the next five years. The annual rate of federal government spending will also increase by 25% or by close to $1 trillion per year in those five years. 

Notice that if spending control is to be used to slow or reduce the nation's debt, the choices are limited to make a noticeable impact. Nine of the 10 spending categories listed below will increase between 2016 and 2021. But the expenditure increases are small for all of those except for three. The increase in defense spending is expected to be $58 billion; for income security the rise is $19 billion. Compare those amounts to the much bigger increases for Social Security ($281 billion), Medicare ($220 billion), and Net Interest ($194 billion). Since the latter is unavoidable, we are left with only two real opportunities to make a dent in spending and the debt. 

No one wants to push old people over cliffs. But if one is sincere about managing the country's debt load, the choices are pretty limited. And notice again, we are not talking about cuts in any program. The annual amounts of spending for Social Security and Medicare combined will increase by half a trillion dollars per year by 2021. That's a whopping per year 31% increase in Social Security spending and 32% per year for Medicare. Don't tell me there isn't room to cut before it starts to hurt grandpa. 

10 Year Budget Projections
(in billions of dollars)	2016	2021	Change	% of Total
Social Security	910	1191	281	30
Medicare	692	912	220	23
Medicaid	368	474	106	11
Healthcare Subsidies	42	85	43	5
CHIP*	14	6	-8	-1
Income Security	304	323	19	2
Defense	584	642	58	6
Net Interest	241	435	194	20
NonDefense Discretionary	600	641	41	4
Total	3755	4709	954	100
Government Debt	14.2	17.7	3.5
Held by the Public
(in trillions of dollars)
Trust Fund Annual
Deficits and Surpluses
In billions of dollars
	2016	2019	2021	2027
Social Security	30	-23	-96	-366
Medicare	-6	3	-8	-90
Mass Transit	57	-16	-18	-25
All Trust Funds	314	72	-20	-454

*Children's Health Insurance Program

Free College Tuition

Let’s suppose for a minute that you are not a fiery participant in any wing. That is, you are not easily swayed by slogans and finger-pointing. You are from Missouri the so-called “show me” state. Let’s suppose that no matter what a candidate or a member of government proposes you would at least try to look at all sides of the proposal. Wow. This is already sounding crazy. Where is my JD?  Is there anyone left who thinks that way? Just in case the answer is yes, let’s move on.

Why does Hillary Clinton want to propose free college tuition? In fact, why free anything? Recall that economics teaches that us that stuff usually costs something to make. A My Pillow is the best pillow ever invented. If you watch TV ads you know why.  You don’t expect to get such a pillow for free. Why?  Because its inventor had to make it and all that activity costs money. It seems fair to give Mr. Pillow some money in exchange for his My Pillow. It seems fair too since your life will be totally changed by having a My Pillow (or two of them for the price of one). Imagine how sexy you will look and all the attention you will receive after sleeping on your My Pillow. Clearly it must be worth the asking price.

Why doesn’t Hillary Clinton want to make My Pillows free? I can’t answer that question but let’s now flip over to things the government loves to give away for free. Highways are usually free. You just jump on good old Interstate 5 and go anywhere from San Diego to Seattle. What a deal! No wagon ruts there. I won’t go into a long list of other free items because some of you might get inflamed. But the point is made. The government provides things to us free.

You are scowling. Highways are not free. It costs money to design, build and operate them. Tax payers send checks to local, state, and federal governments to pay for all so-called free stuff, whether it is for highways, schools, or for free drug needles to addicted persons.

Okay, since nothing is really free the main question here is whether you want to pay for stuff directly to a capitalist or to a government. Do you want business people to provide all these things through a market economy or do you want government making the decisions? And now all you Wingers are getting your guns loaded. You lefties don’t trust business people to give us a fair shake. You righties think government is equivalent to robbery. But since we are trying to be non-wingers for a little while today, let’s keep exploring this fascinating topic –more fascinating than a Matt Lauer and Al Roker wrestling match. 

Market economists believe that in some situations markets fail and it is possible that governments should intervene. Any microeconomics text book has a chapter called market failures. You don’t have to be Paul Krugman or Bernie Sanders to believe in market failure. All of us believe! I won’t rewrite the chapter here because a vivid example of market failures comes when two parties transact (you and the makers of Tide) and somehow you pollute other people (who live down the stream where your dirty water flows). Those other people are not represented when you buy Tide, wash your clothes, and dump the water into the stream. Thus those other people have to incur costs to undo the harm you did to them. Those costs escape the economic system unless the government intervenes and makes you and Tide pay for them.

Make sense? It does to me. A similar story relates to highways. Joe’s Highway Company comes to you and asks if you will pay $10 for a nice highway between Bloomington and Lake Lemon. You are a smart cookie and you say no. That’s because you know that Peter and Charles will say yes and then pay. And when they pay, you get to ride the highway for free. This is called the free-rider problem and it can result in not enough highways being built unless government decides that lots of people will benefit and taxes them. Thus more money is raised and more highways gets built.

Enough you say! Okay – government gets to do a few things. But what about free education? Free education satisfies the free rider issue. We all benefit from an educated population. We want our kids to be educated and we want people to pay for it through taxes. While most of us would agree that K-12 gives citizens the basic skills necessary to be good citizens, there is more debate about higher education advancing our kiddies beyond the the necessary levels of reading, writing, and arithmetic. States have subsidized advanced education for their citizens but the question remains as to how much more society benefits from courses and degrees after high school graduation.

College education might simply advance the skills of the person who encounters a degree—and not so much his or her neighbor’s welfare. In that case it makes sense for only the individual to pay for the education.

But what about people who can’t afford a college education? That’s a stickier wicket. We help people with low incomes in many ways. We reduce or eliminate their income taxes and we give them subsidies. We make them eligible for food and housing and heat and medicine and so on. But we don't buy diamond rings or even entry level Fords Fiestas for poor people. Free stuff to the poor has limits. Where exactly does a free college education fit in to that? Is it more like a diamond ring or a chicken in a pot?

Finally, a few more words about unintended effects. Prices are about value. When you say something is free – it is bound to reduce its value.  I worry that free college education will harm one of the strongest industries in the USA – higher education. Free higher education may attract some of the wrong people. Already higher education spends a lot of money and time on things unrelated to education. I fear that making it easier for people to attend will exacerbate those trends. We hear people complaining that college is more about having fun and socialization than about gaining knowledge and skills. Do we really want to spend the people’s money on fun and socialization?

Larry, you don’t give a fig about those young people who are dying to get a college education but can’t afford it. But that is exactly who I do care about. I want them all to attend college. They will be willing to put some skin into the game. Show me how Hillary’s proposal will differentiate between those who will be truly helped and those who will go along for a nice free ride.  Imagine how much more we could devote to those who really want/need the help if we make that distinction. Hillary's proposal includes any household with incomes below $125,000. I wouldn't call a family that makes $125,000 per year poor. Would you? Or is this just about doing something to get Bernie’s supporters to vote for her? Or maybe a backdoor means for government to control costs of higher education?

Spending Spending Spending

Last week I spouted profusely about Federal government deficits and debt. I likened the government to the pepperoni pizza addict who ate the whole thing last week and this week not only ate his own large pie but also finished his wife’s left over clams with linguine (with a hint of hot red peppers).

It makes no sense to me that a government that goes into debt during a national and world emergency should plan to go even further into debt after the threat is well over. This is exactly how a nation flirts with becoming the next Greece or Venezuela. I show below how it might be possible do better than we are presently doing. It won’t be easy but it is possible. Waiting will only make it much harder.

For example, the results below show that with the spending and tax revenue projected for the next 10 years we could begin to chip away at the problem of deficits and debts. But it would take a decline in benefits of major mandatory spending programs of around 20% of the 2025 estimate. Of course spreading the pain among tax revenues and other spending would reduce that amount somewhat but it gives you a feel for what already must be done to get us back to anything approximating normal. If we add even more to debt in 2016 the difficulty explodes.

One of my alert readers who awakened from a thirty year slumber asked me off line to go a little deeper into the details behind the debt numbers. So for the sake of my huge (did I say huge?) and growing cadre of faithful followers I decided to strain my eyes and crane my neck over the reams of data published by the Congressional Budget Office. The most pertinent of those data are found neatly packaged by me below.

Before boring into the numbers, let’s do a little review of government budgeting. The government loves us and therefore deems it possible and legal to take money from the mouths of our children and distribute it over Iowa from helicopters. No I am just kidding. The government has the power to tax. In America the biggest federal taxes are imposed on income of persons and corporations. They also collect something confusingly called the payroll tax when in reality it should be called the let’s be nice to old folks tax. But naming these things is not my quibble today. The government also levies about 10 million other little taxes that are often collectively named “other”. Many of you are familiar with the gasoline tax that you happily pay each time you go to the pump and then buy a lottery ticket and a Twinkie.

The sum of these annoying federal taxes is labelled as Total Revenue below. You also pay taxes to your state and local governments but we will ignore those today. The table tells you that these Total Revenues amounted to almost $2.2 trillion in 2005. And no, Donald Trump did not pay your taxes or mine that year. Below those government revenues in the table are found the expenditures or outlays which are the ways the government gives us our money back. Yes, they take with one hand and give back with the other. Well – they actually give us back more than we pay in and that is the rub because when that happens and it usually does, the government goes deeper into debt. But I get ahead of myself.

Government spending is often divided into three main categories – mandatory, discretionary, and net interest. Mandatory spending means that these categories of spending are very difficult to change because if you change them Jimmy Hoffa will get you. Discretionary spending refers to items that are usually negotiated each year by Congress, while mandatory spending is set out in laws that extend payments into the future. You might say the future amounts are contractual. Notable mandatory items in the US budget include Social Security, Medicaid, Medicare, disability insurance, and more.  Surprisingly defense and many poverty programs are included in discretionary spending. Notice that since much of mandatory spending relates to people of my age – young people have a keen interest in how these spending totals are shaping up.

Last week I wailed about alarming increases in future government deficits and debt. This week I look into how spending and tax revenues generate those scary statistics. My comments come from the table directly below. The table divides and compares budget information for ten years into the past (2005 to 2015) and ten years into the future (2015 to 2025). The first three columns give you the budget numbers for 2005, 2015, and 2025. The next four columns focus on the 10 year changes (in dollars and in percents).

The time period from 2005 to 2015 starts with a strong economy, endures a recession in 2008 and 2009, and then recovers slowly from the recession. The future from 2015 to 2025 is unknown but the CBO estimates these future numbers based on relatively slow growth but without a recession.

First, debt is rising despite large increases in tax revenues. Tax revenues will rise by $1.5 trillion in the future after rising by a little more than a trillion in the past. Revenues will increase by 48% after rising by 51%. I am sure folks in the middle class would love to experience that kind of growth in their personal incomes.  Tax revenues will reach almost $5 trillion in 2025.

Second, the big generator of total revenue is income taxes. The future will see a rise of $988 billion or about 64%. Total income taxes will rise from $1.5 trillion to $2.5 trillion from 2015 to 2025.

Third, despite huge increases in government revenue – we are planning to increase spending even more – from $3.7 trillion in 2015 to $6 trillion in 2025. Wowee – that's an increase of 64%. That increase of $2.4 trillion in the future doubles the past increase of $1.2 trillion. DOUBLES!

Fourth, in 2005 federal spending on mandatory categories at $968 billion was less than discretionary spending of $1.3 trillion. But that was about to change. Mandatory spending is the big spending hog. Notice that while spending on mandatory items will rise in the future by $1.6 trillion (69%), spending on discretionary items will increase by $232 billion or by about 20%. Notice also that these discretionary future increases come after a decade of decline (-$154 billion or -12%). As of 2025 mandatory spending will be $3.9 trillion compared to discretionary spending of $1.4 trillion.

Fifth, notice that net interest spending increased by only $39 billion in the past but is expected to rise by $545 billion in the future. This is no surprise given how long the 

Fed has kept interest rates so low. This shows you the importance of the national debt. If the debt was to return to normal we might save a lot of money on interest. 

Finally, notice the last line of the chart. This shows you that we have gone from an excess of past spending over revenues of $319 to $438 billion to a future amount equal to $1.2 trillion. If we knocked the $1.2 trillion down to something more normal like $400 billion we would reduce the excess by $800 billion. $800 billion amounts to 21% of mandatory spending in 2025. But even this change does not stop debt from rising. 

	2005	2015	2025	Chg	Chg	% Chg	%Chg
Revenues				Past	Future	Past	Future
Income tax	927	1541	2529	614	988	66	64
Payroll tax	794	1065	1531	271	466	34	44
Corp. Inc tax	278	344	421	66	77	24	22
Other tax	154	299	337	145	38	94	13
Total Revenues	2153	3249	4818	1096	1569	51	48
Spending
Mandatory	968	2299	3875	1331	1576	138	69
Discretionary	1319	1165	1397	-154	232	-12	20
Net Interest	184	223	772	39	549	21	246
Total Spending	2472	3687	6044	1215	2357	49	64
Spending minus	319	438	1226	119	788	37	180
Revenue
CBO.gov

US Governement: Liars and Thieves?

Mom, I need a bigger allowance. Honey, Pops and I gave you a bigger allowance last week because you said you had to pay off your debt to the cannabis store. I know Mom, but when I went to the store I saw some really cool edibles and now I owe them even more money.

Stupid, eh. But now replace the word Mom with tax-payer and the word Honey with the US Government. President Obama and his cast of stooges make no sense. If we go along with this nonsense then we deserve whatever happens to us in the future. 

Congress is going to give the President a short-term budget with higher military spending and he is going to veto the bill unless they also add more spending on domestic programs – and make all of it permanent. You’d think that we have a deficiency of government spending in this country.

Recall – we have a national debt that soared when the government “rescued” us in the wake of a world financial crisis. Former Fed Chair Bernanke is now making a pot of gold out of a book and book tour giving us his version of what happened when the Fed went arm in arm with our Government during those hairy days. At least someone is getting rich from all this craziness. But I digress. Our national debt (held by the public) went from about $5 trillion in 2007 to $9 trillion in 2010 and then kept on growing. It was almost $13 trillion in 2014. Nice going dudes – you almost tripled the national debt in a mere 7 years. We thought the increase was going to be temporary. Hmm. Read on.

Have you heard the US government moaning and worrying about all that debt? Have you heard the President pointing his finger at Congress demanding that they not imperil our fine land with debt, pointing out all the possible long-term unintended consequences of a major increase in debt? Did the Republican Party engineer a major austerity program? You might think we had such a thing when you hear about budget caps but nothing could be farther from the truth.

Like the kid on cannabis, we are spending more and more and we are getting deeper in debt. You think I am making up stories? Go to the CBO website and you will see that without any of the currently discussed spending additions being proposed, the debt will reach $16 trillion in 2019 and then $20 trillion in 2024. Watch the politicians in coming days…wringing their hands over the horrible austerity we Americans have had to endure. But austerity means falling debt so there is something wrong with this story. 

As you listen to them explain why we need more spending (and taxes) just look at the data below.

Total Federal government spending will increase by 5.3% per year for five years and then by 5.5% per year for the five years after that. Does this sound like an austere budget? Those increases are per year. Imagine if your wage went up 5-6% per year. Starting with $3.5 trillion in 2014 total spending will have risen to $5.7 trillion in 10 years. Poor Poor government. How can they possibly live on an increase of $2.2 trillion?

Point of emphasis – these numbers are estimated by the bipartisan CBO based on spending bills already passed – spending will grow faster if the Ds and Rs and O get together on a deal to spend even more.

Table. CBO Projections for Government Spending based on current budget law. Yearly amounts are in billions of dollars. Changes are percent change per year. 

                         2014   2019  2024  2014   2019

                                                          to        to

                                                       2019   2024

Mandatory       2,099  2,783  3,586    6.5      5.8

Discretionary   1,179  1,222  1,362    0.7      2.3

Net Interest         229     437     710  18.2     12.5

Total                 3,506  4,443  5,657    5.3      5.5

And by the way, your tax bill is not going to go down. This rapid spending has consequences for both higher tax revenues AND a larger debt. The government’s tax revenue will rise from about $3 trillion in 2014 to $4.8 trillion in 2024. In 2024 the government deficit is estimated to be almost $900 billion in that one year alone. Above I explained that the total debt will rise from $13 billion in 2014 to $20 trillion  in 2024. 

I am getting dizzy. Where is the JD when you need it?

Total spending is composed of mandatory, discretionary, and net interest. Mandatory spending is ongoing and determined by past laws. Social Security, Medicare, Medicaid, Obamacare subsidies, disability insurance are the main programs that fall into that category. Notice that Mandatory spending is the biggest part of spending at $2,1 trillion in 2014. It will increase by 6.5% per year for five years and then by 5.8% per year in the remainder of the decade. Does that sound like austerity to you?

Discretionary spending is a smaller component that includes a lot of other things including defense and many non-defense programs. After rising by less than 1% per year for five years it will then increase by 2.3% per year. Program recipients might complain about the rate of growth -- but even these programs are scheduled to grow if past legislation is extended to the future. 

Check out Net Interest which will grow by an average of about 15% per year for the next 10 years. Beginning at a humble $229 billion it will balloon to more than $700 billion in 2024 alone.

Don’t fall for those politicians who scare you by showing you real declines in some heart-rending discretionary programs. They control every line item in the budget. They have already signed off on $800 billion more annual spending on mandatory programs between 2014 and 2019. If they took even a meager $100 billion off that increase, they could add it to Discretionary programs that are most hurt. If they shifted that $100 billion then we would be spending $1322 billion in that category in 2019 and the growth rate in the first five years would jump from 0.7% per year to 2.4% per year.

The long and the short of it is that this government is spending too much of our money on government programs. While it cannot do much to reduce spending on interest, it can address all of our important needs without adding a dime to whatever is already in the pipeline. Don’t be fooled by these jackals. Ask them how a larger national debt is going to expand employment and help the average guy and gal. If they want to spend more on X, then they should spend less on Y. That's their job. We should tell them to do that.