Tag: Economy

Spending Crisis – Part I

George Noga
At root, the spending crisis is moral rather than economic.
Spending Crisis – Part I
Introduction and Background

By: George Noga – April 28, 2019

           This is the first post in our series about the spending crisis. It is a spending crisis and not a debt or deficit crisis because it is the spending that drives both the debt and deficits. It is a moral rather than an economic crisis because preventing the crisis requires only summoning the national will to control spending. It is about who we are as a people, what kind of country we bequeath to our children and our national security and survival. I have marshalled all the facts, logic and wordsmithery I possess to explain this crisis in an objective and non-political manner.

Our series is in four parts. Part II, Analyzing the Data, will be distributed May 5, Part III, Possible Solutions, on May 12, and Part IV, Can Catastrophe Be Averted?, on May 19. The full series is now on our website www.mllg.us. The series was reviewed in advance by three experts with diverse viewpoints. I carefully considered all their feedback, incorporated much of it and offered to publish any dissenting opinions.

         In addition to my MBA, CPA background, I have studied economics for 50 years. I devoted much of one summer in Montana to constructing a quantitative model of the US economy, including the deficit, which has proven to be highly accurate. I have been writing about the crisis of spending, debt and deficits for over a decade.

Background Information

         US GDP now is $21.0 trillion; the public debt is $16.3 trillion, while the total debt is $22.2 trillion. This results in a public debt to GDP ratio of 77.6% and a total debt to GDP ratio of 105.7%. The $5.9 trillion difference between the total debt and the public debt consists of intragovernmental debt, which mostly is money owed to Social Security and, to a lesser extent, to FHA and other agencies. For example, when Treasury spent the Social Security surplus, it issued special non-negotiable bonds.

        Throughout this series we use the public debt ratio and not the total debt ratio because intragovernmental debt is notional, with interest accrued and not paid in cash. It is analogous to writing yourself an IOU. Most who cite the higher total debt ratio do so out of ignorance or as a scare tactic. However, there are some credible sources who believe total debt is more relevant than public debt. If they are right, our debt ratio is 105.7% and not 77.6% and America is much worse off than described in this series.

           There are some who minimize the seriousness of the current ratio because it was higher (115%) in the aftermath of WWII (the only time prior to 2009 it was above 50%) and America easily recovered. However, the WWII deficit saved America from totalitarianism and was transitory. Afterward, war expenses ceased, Social Security ran surpluses, Medicare didn’t exist and demographics were favorable. Now, the deficit is structural; Social Security, Medicare and pensions run huge deficits and demographics are bleak. We are in the tenth year of an economic expansion and growth is 3%; yet, the FY 2019-2020 deficit will be $1.1 trillion and increasing each year thereafter.

       It must be noted that many states, counties and cities also are in serious debt trouble and will, at some point, require federal government bailouts. Private debt is hovering at an all-time high. The world debt to GWP (Gross World Product) ratio currently is 84% and spiraling upward. Global debt (public and private) is $230 trillion and is over 300% of GWP. Although these issues are beyond the scope of this spending crisis series, they deserve at least some recognition.

          We close with some examples that seem to defy expectations. Japan’s debt ratio is 250%, but dedicated pension assets lower the effective ratio to 110%. The NIKKEI index is down 46% from 1989 and economic growth is 1% amidst chronic deflation. Greece’s ratio hit 180%; it avoided default due to its small size and bailout by the EU. It’s economy contracted, pensions were halved and there was social and political upheaval. Italy, with a 130% ratio, is following in Greece’s tracks. Even though they avoided default, Japan, Greece and Italy did not escape the consequences of massive debt; they all have suffered lost generations and their crises are far from resolved.

Next on May 5th is Part II of our series about the spending crisis.

Debt Crisis Timetable Accelerating

George Noga
When Titanic struck the iceberg, it remained afloat and the disaster was not yet apparent. However, its fate was irreversible from that moment; so it is with a 90%  debt/GDP ratio.
Debt Crisis Timetable Accelerating
By: George Noga – August 1, 2018

       I have a recurrent nightmare about an endless train, brimming with passengers and priceless cargo, slowly but inexorably hurtling along its tracks toward a bottomless abyss. The engineers, conductors, passengers and observers all know the train is going over the cliff; however, instead of trying to stop the train they are opening the throttle to speed it up. When I awake, I realize it is no nightmare; it is happening right now to the United States of America. Following are data just released by CBO and SS.

  • Social Security begins devouring reserves this year, 4 years earlier than projected last year. Reserves will be depleted in 15 years and benefits would require a 25% cut.

 

  • Medicare will be unable to pay scheduled benefits in 8 years; just during the past year this shortened by 3 years. What does that say about the integrity of the data?

 

  • Deficits average $1.5 trillion (total $15 trillion) over the next 10 years (based on current policy), raising the public debt/GDP ratio to 105% per the latest CBO estimate.

 

  • Interest on the debt will triple to just under $1 trillion per year within 10 years per the June 2018 CBO report. Debt service will soon overtake defense spending.

 

  • The really bad news is that the projections cited above, by government agencies, are wildly optimistic. None assumes a recession during the coming decade, while it is nearly certain there will be one or possibly even two. Recent projections made by private sector economists (Fortune Magazine, Cato Institute) are much worse.

       No one cares! For most Americans the problem is too abstruse; they are tired of hearing pundits cry wolf; and there is no discernable impact on their daily lives. For politicians, tackling the issue has no upside; it is all downside, including possible electoral loss. No constituency exists for reining in benefits, cutting spending or raising taxes; the political apparat favors the opposite. Each year that we dithered, the problem became more intractable and costly; now, finding a solution is virtually hopeless.

        Economists believe the point-of-no-return is a public debt to GDP ratio >90%; the World Bank says 77%. The US already is at 77% and will reach 90% much earlier than believed only months ago. The crisis doesn’t begin when we exceed 90%; it just means there is no going back. The Titanic remained afloat a long while after it struck the iceberg and the crisis was not immediately evident to those aboard. Nonetheless, the moment Titanic hit the iceberg, its fate became irreversible; so it is with a 90% ratio.

       As my nightmare continues, nothing happens until after the train goes over the cliff and we are subsumed by crisis. Panicked politicians impose a VAT, modest at first, but rapidly ramped up to European levels of 20+%. Income taxes skyrocket. Only token changes are made to entitlements. Economic growth tanks. Defense is compromised. There is a 15-25 year lost generation as we morph into a European-style welfare state. People lead lives of quiet desperation and the USA, as we know it, ceases to exist.

      There are two certainties about the impending debt crisis: (1) if something cannot go on forever, it won’t; and (2) excess debt ultimately must be purged from the system. The debt can be purged only via higher taxes, less spending (especially entitlement spending), hyperinflation or repudiation; there are no other options.

      By the time the crisis hits, a combination of new and higher taxes and spending cuts totalling $1.25 trillion per year in today’s dollars (25% of the budget) for 15 straight years will be needed just to get back to today’s 77% debt/GDP ratio. That should give you some perspective about the devastation that purging the debt will wreak on America – as well as the reason for my recurrent nightmares.

Our next post on August 10th documents great causes turning into rackets.
MLLG

The Panacea of Economic Growth

George Noga
By: George Noga – November 1, 2014
       Throughout its 238 years, the US economy has grown by over 3.0% annually, although data for the early years are problematic. For the 60 years from 1940 to 2000, the US economy grew at a rate of 3.6%. For the following 14 years from 2001 to the present, GDP grew by 1.8%, exactly half that rate. If growth remains tepid, Americans will not recover the ground they lost and their children and grandchildren will, for the first time, be worse off than the previous generation.
        America has transmogrified into Europe which is in permanent recession due to its failed economic policies. Even stalwart Germany is beginning to stagnate. France is destroying its economy in a fit of socialistic angst. Italy has a lower GDP per capita than it had 15 years ago. Meanwhile in Brussels, Jean-Claude Junker continues to strangle EU countries with bureaucrats and regulations. In Europe a 2% growth rate is seen as optimistic, 1.5% as acceptable and no growth as possible. The average European in one generation fell 25% behind the average American due solely to differences in GDP growth. As I wrote last month, just in the past 5 years, the average American has been impoverished by 17% due to the low growth rates coming out of the recession compared to the historic growth rates in similar times. In short, we already have become like Europe although Europe continues to plumb ever new depths. We are well along in suffering a lost decade on the path to a lost generation; our progeny, like Europeans today, will lead lives of quiet desperation.
“Failure to grow America’s economy is a choice; decline is not inevitable.”
        Failure to grow our economy is a choice; decline is not inevitable. It is a choice made by our political leaders solely because they prefer to demagogue inequality, class warfare and corporate profit for perceived electoral gain. It is a choice made by the media because they are lazy, economically illiterate and prefer to flog dead camels. It also has been a choice made by ordinary Americans in the voting booth for all of the aforementioned reasons advanced by politicians and the media. There are strong signals however that ordinary Americans now are beginning to want economic growth.
Economic Growth as the Panacea

        As trumpeted by the headline of this blog post, economic growth is a panacea; indeed, it is the only solution for every problem (real and perceived) that we face today and for the coming generation. It is apropos that Panacea is the Greek Goddess of healing because strong economic growth will heal everything; to wit:

  • The crisis of spending, debt and deficits: A sustained period of strong economic growth (combined with some spending restraint) will enable the US to restore fiscal balance and to stabilize its debt thereby gradually lowering the Debt/GDP ratio to its long-term historical level of around 30%.
  • Climate change and environment: If in the distant future climate change causes some issues, the best antidote is a vibrant economy that will easily enable us to spend whatever is needed to mitigate any such problems.  Only countries with strong economies can afford to spend copiously on the environment.
  • National security: The single greatest asset (weapon) we possess for our national security is a growing, resilient economy. This enables us to spend whatever is necessary to deter any possible adversaries and to defend ourselves should that be necessary. Weakness invites aggression and fosters terrorism.
  • Jobs, poverty and inequality: It is economic growth, not government, that creates jobs. It is sustained growth that fulfills the American dream and eliminates poverty; moreover, growth is the great equalizer.
  • Unfunded mandates: The USA is facing $350 trillion (over one-third of a quadrillion) in unfunded commitments in the next 50 years for Social Security, Medicare, government pensions, Obamacare and other programs.   Absent  a high rate of growth, these promises not only cannot be kept but will require drastic reductions in programs.
Recipe for Economic Growth

      Okay, so economic growth is the panacea; what must we do to achieve it? The answer is straightforward and attainable. If we do the following  we will achieve vigorous, long-lasting economic growth.

  1. Political consensus: Probably the single most difficult hurdle for achieving growth is reaching a political consensus. Politicians and the media must agree to pursue policies that maximize growth and agree to stick with such policies for the long term. They can continue to argue over how to divide the wealth that results; that is what politics is about. Absent some consensus however, achieving sustained growth becomes problematic.
  2. Tax and fiscal policy: Taxes (personal and corporate) must be reduced, simplified and stable. People and businesses must be able to plan ahead and certainty about taxation is indispensable to investment and job creation. In the same vein, spending needs to be restrained.
  3. Eliminate uncertainty: Business hates uncertainty; it stifles planning and results in gridlock. There needs to be a broad and sustained political understanding about taxes, regulations and new initiatives.
  4. Sound money: The Fed should focus only on maintaining sound money and fighting inflation. A strong, stable and sound dollar are indispensable for a vibrant economy.
  5. Regulation: The economy is being strangled by regulation and litigation. We need to have a moratorium on new regulations while we gradually reform and roll back existing ones. Our tort system needs to be reformed.
  6. Energy: We should develop every possible energy source including ANWR, offshore and shale and natural gas on federal and state lands. We should export LNG immediately from many terminals and, of course, construct the Keystone XL Pipeline. Such a policy will create jobs, make us energy independent, stimulate the economy and, importantly, prove to be a potent weapon in keeping Putin and Russia in check.
  7. School choice: I include this because educated, trained workers are a potent economic resource. Further, school choice will bring about more equality and reduce poverty. It also is a panacea.
     The choice is ours. We can continue on our present slow growth trajectory which will condemn future generations to a downward spiraling economy and reduced living standards; they will experience untold miseries as the crisis of spending, debt and deficits culminates in a meltdown. They will inhabit a Clockwork Orange nation drowning in taxes, regulation and uncertainty. They will have part time jobs for low wages. At best they will collect 65% of the present Social Security benefits deferred until they are age 70; Medicare and Obamacare (also age 70) will be busted; health care rationed and long waits common for poor treatment. They will inherit a volatile, dangerous world where nuclear weapons proliferate, a revanchist, aggressive Putin-led Russia and all without the resources for adequate national defense.
       Or, we can make a different choice; we can choose to reject decline and to embrace high-growth policies. This would lead to a virtuous circle of better education, abundant and cheap energy, and to a far safer and more secure nation and world. It would result in fixing the debt crisis and funding all the promises we have made for the future. Most of all, it would help ordinary Americans. As year after year of high growth enriches America, the politicians can fight over how to best divide up this cornucopia – including addressing any inequality issues.
       Firstoff however, we must make the right choice. This gets us right back to the heart of Alexander Hamilton’s question: “Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.” Is America today still capable of putting politics aside when self preservation is at stake? Or, do we heed the Siren song of politicians advocating failed ideologies, searching for Utopias and demagoguing political correctness, class warfare and inequality?

Into the Eye of the Debt Hurricane

George Noga

Update on the Crisis of Spending, Debt and Deficits
By: George Noga – September 20, 2014

     By some metrics the debt storm has abated. Compared to earlier deficit projections published herein, the USA is slightly better off, with the difference due entirely to the massive Obama tax increases. The deficit this FY ending September 30 is $500 billion, equal to 3% of GDP; meanwhile GDP is increasing around 2%, meaning the deficit is growing only slightly faster than the economy, a marked improvement. However, great damage already has been done; moreover, we are merely in the eye of the debt hurricane – it may appear sunnier at the moment, but the deficit storm will soon resume with even more ferocity and we will all be blown away.

The Seen and the Unseen

     The US economy already has sustained massive body blows. The reason we don’t clearly see the damage is due to the difference between the seen and unseen – or, more to the point, the difference between the reported and unreported.

  • In past recoveries following major recessions, the US economy has grown by an average of 5% for the subsequent 5 years; this results in a compound growth rate of 27.6%. Instead, we have experienced 2% compound growth yielding only 10.4%. The difference of 17.2% is the growth deficit. Simply, the average American today is 17% worse off than he/she should be; but we don’t see what should be; we only see what is. Nevertheless, the reality is that every American has been impoverished by 17% just during the past 5 years.
  • We see the increase in federal tax revenue and the concomitant reduction in the deficit. Unseen are the massive tax hikes that produced the revenue. Individual tax brackets increased with the top rate going to 39.6 % – a 13% increase. Investment related taxes were savaged with capital gains rates going from 15% to 23.8% (59% increase) and dividends from 15% to 43.4% (289% increase). Medicare taxes increased 62% and the upper limit was removed. There was a new surtax on investments of 3.8% and the death tax went from zero to 40%. New individual and employer Obamacare taxes took effect along with scores of other Obama tax hikes. The 35% corporate tax rate (world’s highest) is responsible for shifting jobs and investment abroad and businesses keeping $2 trillion overseas. The unseen effects of these massive tax increases will hobble the economy until abnegated.
  • We can see the reduction in the official unemployment rate; what is unseen is the jobs disaster that is America today. There are 12 million out of work, 12 million on disability and nearly 50 million (one in 5 households) in breadlines – err, on food stamps. The labor force participation rate hit a 35 year low. All (net) jobs being created are part time; there are legions of 29ers and 49ers. The true rate of unemployment is 15%, not the 6.2% reported.
  • We see Social Security and Medicare meeting their current obligations but we do not see the demographic time bomb looming for both programs. There is nothing on earth as certain as demographics; 77 million more boomers will retire (10,000 every day) and begin Social Security and Medicare. Spending on both these programs will grow by 8% compounded – doubling every 9 years. Within 10 years we will spend our entire budget on entitlements and interest on the debt leaving nothing left over for defense or for the rest of the government.
  • We see interest rates on federal debt hovering around record lows costing only $225 billion currently. We blissfully do not see what the interest would cost given a return to average interest rates, i.e. interest cost would increase $500 billion per year to $725 billion, or triple today’s cost. And that’s the rosy scenario. This is a no-win situation: keep rates low and the economy is grotesquely distorted and savings and investment are savaged or raise rates where they should be and the budget deficit goes thermonuclear.
  • We see government regulation exploding, uncertainty rampant and the scepter of Obamacare hanging over all of us like the sword of Damocles. We do not see the stultifying effects of all these on job creation and the economy.

     Looking at the gestalt paints a funereal picture. Average Americans already are 17% poorer over the last 5 years than they would have been in a normal economic recovery – and they will continue to get relatively poorer and poorer each year without any end in sight. The tax and regulatory burden, particularly on investment, has skyrocketed, halting new investment and job creation. Behind the “official” 6.2% unemployment rate lays a dystopian jobs nightmare; we are turning into a country of part time workers. We are reaping a demographic whirlwind still in its early stage. We are living on the razor’s edge regarding interest rates; we have a Hobson’s choice: ballooning interest costs or maintaining negative real interest rates. Finally, all this exists within a milieu of hyper-regulation, vast uncertainty and, of course, Obamacare.

Current CBO Projections for Spending, Debt and the Deficit

     Recently (July) the CBO released its latest forecast. The CBO alternate baseline forecast (its most realistic) assumed the average middle class family’s tax burden doubles over the coming generation; it also assumed no more recessions, wars, terrorist attacks, natural disasters and that interest rates remain low perpetually. Despite these horrific (taxes doubling) and grossly unrealistic assumptions, the results are disastrous. The deficit increases by over $100 trillion and the CBO stops forecasting because it can’t conceive of a functioning economy under those circumstances. And all this, dear readers, is based on an uber-optimistic forecast; the reality is much, much worse!

     We have been grazing on the fiscal commons for a long time; the pasture is about to give out and the spring lambs are doomed to a life of quiet desperation. We can muddle through for a few – perhaps several – years with temporizing and half measures. Soon enough time will run out and the ineluctable tipping point (Minsky Moment) will be reached. It will get ugly for an extended period, i.e. a lost generation., Eventually, when we emerge from the rubble, we may get it right again – only because there are no other choices – and America will again enjoy more liberty and less government!

Balanced Budget Amendment No Holy Grail

George Noga

By: George Noga – Updated March 10, 2014

     A balanced budget amendment (“BBA”) is favored by 80% of all Americans in the belief it will, once and for all time, force fiscal discipline on the government. They are putting way too many eggs in the BBA basket. Watch out what you wish for. If there is a BBA, all those eggs will end up scrambled into a rather unpalatable omelet.

  There are myriad paths through, over, under and around a BBA. In short, it would not be worth the paper it was written on – assuming it can garner two-thirds majorities in Congress and ratification by 38 states. Following is a partial list of ways a BBA could be eviscerated.  

  1. A BBA appears simple but is complex. How do you define budget; what does balanced mean; what is a tax? It would be the only part of the Constitution that could be waived.
  2. What are allowable exceptions such as for military actions and natural disasters? There will be escape hatches big enough to drive a truck through. Whatever exceptions are carved out for some things, expect many more of such things. How would waivers work?
  3. How would a BBA deal with economic cycles? Revenues can both skyrocket and plunge from year to year. Are we to slash spending in a recession and be profligate in a boom? How do we define recession and boom? How is a BBA to be managed over the course of an entire economic cycle without opening to door to great mischief?
  4. Lawsuits will tie up a BBA for decades and federal judges will wind up with enormous power to change it. Consider how the federal bench has dealt with desegregation and busing; they still are entangling themselves over 60 years after the initial ruling.
  5. How do we distinguish capital expenditures from annual expenses? Surely, the argument will go, a BBA was not meant to include infrastructure spending that has a life of 50 years. If capital is treated differently, more expenditures will be classified as such.
  6. How do we address off-budget spending such as by Fannie, Freddie, USPS and the Federal Reserve? Who will prevent government from creating scores of new off-budget entities? Do we exempt interest on the debt; what happens when interest rates skyrocket?
  7. Watch out for so-called special taxing districts; these are favorites of local government with 50,000 nationwide. If they are not under the BBA ambit, they will mushroom.
  8. Are Social Security, Medicare, Medicaid and civilian/military pensions to be part of the regular budget? Are they no longer to be considered off budget entitlements?
  9. User fees will sharply increase and the government will be creative in imposing new ones. Be prepared to pay handsomely for everything you get from Washington – how about $100 to file a paper income tax return or $50 to get into a national park?
  10. Loan guarantees will become de rigueur as a way to fund programs off budget. After all, a loan guarantee is not an expenditure – is it?
  11. Instead of direct taxation, costly new regulations will flourish. Rather than spend tax money, Congress will bypass taxes and accomplish the same result through regulation.
  12. The tax code can be used for far more than raising taxes subject to a BBA. It can be larded with tax expenditures, incentives, penalties and all sorts of tomfoolery.
  13. Don’t forget mandates. Since the ObamaCare mandate survived judicial scrutiny, what is to stop government from substituting mandates for taxes or spending? The feds could   mandate that states, counties, cities (and even people) spend money not subject to BBA.
  14. A budget can be balanced with tax increases. This would strictly comply with a BBA but tax increases are certainly not what BBA proponents intended.

     Reluctantly, I have come to the view that a BBA is not the answer because: (1) we would expend lots of energy (perhaps for naught) enacting a BBA better spent elsewhere; (2) it will not work for all the reasons noted supra; (3) it would beguile us into falsely believing the problem is solved once and for all; (4) many of us would declare victory and move on while the other side would keep fighting; and (5) you can’t take the politics out of politics.

     The solution is to remain engaged permanently, albeit this is contradictory to human nature. Once a problem appears solved, we tend to go back about our private business. But big government and its acolytes never stop and neither must we. As seductive as it may seem, a balanced budget amendment is fool’s gold; it is not the Holy Grail.