Red ink, red ink everywhere
And precious little political courage to start dealing with it. Here's a look at obvious, and hidden, liabilities and how our leaders might start chipping away at them. One key will be Obama's speech this week.
Pete Souza/White House
Reader Stuart Jenner last week expressed concern about the unfunded public-pension liabilities plaguing state and local governments, and how these are not even discussed in the present debate about federal debt and deficits. There also are so-called unfunded mandates in which federal departments and agencies lay responsibility for policies and programs on state and local governments, and the private sector, without providing any money to pay for them. (These will be examined in a future article).
Wherever you turn, there is more red ink than you suspect.
The big federal numbers usually cited — that is, $14 trillion in current long-term debt, with $1 trillion-plus deficits coming in each of the next 10 years — are the subject of the current congressional Gang of Twelve debt-reduction exercise, to be completed by Thanksgiving. (If the bipartian congressional group cannot reach agreement on long-term proposals, then arbitrary cuts will kick in, equally divided between Defense and non-entitlement spending — and what a nightmare that would be).
Differing economic-growth projections have federal debt ranging between 62 and 82 percent of our Gross Domestic Product (GDP) in 10 years. The flatter the growth, the greater the percentage of GDP required for debt service. And the greater the amount required for debt service, the greater the brake on growth: a dismal Catch 22.
Gov. Chris Gregoire and our state Legislature are trying to grapple with unfunded liabilities on several fronts, changing formulae establishing benefit levels; addressing "double dipping" in which public employees simultaneously receive pensions and paychecks; and horse-trading with public-employee and teachers union leaders not known for self sacrifice. Our own unfunded public-pension liabilities are large — especially for those pensions established with generous formulae in strong-growth years — but they are not of the scale faced in many other states.
California Gov. Jerry Brown publicly conceded last week that unfunded pension liabilities for his state's 2.6 million current and retired public employees could amount to $1 trillion. Only last year, a Stanford University Institute for Public Policy Research study had shaken state legislators with its estimate that those liabilities could amount to $500 billion.
A study last year by pension-fund sponsors estimated, after adjusting for a more realistic discount rate, that there were $2.5 trillion in such unfunded state- and local-level liabilities. If last week's California estimate is correct, the national number is now much higher. Most American states have total unfunded liabilities exceeding 15 percent of their states' GDP; a few top 35 percent. Yet, because 49 of the 50 states are legally required to "balance" their official budgets, most voters and taxpayers (and many public officials) are unaware of these huge looming obligations. They underlie some of the contentious battles now taking place in Wisconsin, Ohio, Indiana, and several other states — classic confrontations about public obligations and priorities.
Fed Chair Ben Bernanke, at last Friday's Jackson Hole, Wyoming meeting of financial leaders, made clear that the Fed has done about as much as it presently can to facilitate short-term growth without setting off long-term inflation (although another "quantitative easing" — that is, massive Fed purchases of Treasury bonds — can be expected if growth does not soon pick up). Adjusted data last week showed that second-quarter U.S. growth was only 1 percent, after first-quarter growth of 0.4 percent. Bernanke said it was time for the Congress to stop its confrontations and get to constructive work.
The congressional Gang of Twelve faces the daunting task of devising a long-term-debt-reduction package which will, at the same time, provide some short-term juice to the economy. President Obama this week will present us with his own fresh set of proposals to do the same. They will need to be more specific than the general proposals he made in earlier discussions with House Speaker John Boehner during negotations to lift the federal debt limit.
Some big questions facing Obama and congressional leaders:
•Will they address the big gorillas in the budget room? That is, will they present proposals to bring financial stability to Social Security and Medicare? Contrary to mythology, working-age taxpayers do not pay into retirement accounts from which they draw benefits on retirement. Instead, current wage earners finance the benefits of current retirees. The coming tidal wave of Boomer-generation retirees cannot be financed at current levels by present wage earners.
But modest changes in the retirement age, COLA adjustments, benefit levels, and eligibility could put these entitlement programs in long-term order quite quickly — without changing the rules for anyone now over 55. However,, to do this, Democrats would have to abandon their cynical posture that they are "protecting Social Security and Medicare" from heartless would-be GOP cutters; Republicans would have to back off plans for radical changes or partial privatization. Responsible, incremental changes could save the day. The incremental changes have been well known to policy analysts for more than 25 years, ever since this looming demographic shift became apparent. Elected officials have simply kept postponing the day of reckoning.
•Will they have the guts to take on maginal Defense spending? We are not talking here about the general desire of peace lovers to cut Pentagon money and of hawks to Make America Stronger. Defense Secretaries in both the George W. Bush and Obama presidencies have wanted to undertake basic Pentagon reforms leading to major cost savings but have been sidetracked by the demands attached to interventions in Iraq, Afghanistan, and Libya. The ends of these interventions are at least theoretically in sight.
The only way to save big Pentagon money is to eliminate projected major weapons systems in their entirety. That means overriding the various services' claims that common systems cannot meet their needs. It also means that a first-principles strategic review must take place in which all present and prospective national-security missions are examined and appropriate weapons systems and force levels budgeted to meet them. A hard-nosed, realistic review will bring screams from the services and from major contractors, including Boeing. Obama and relevant congressional leaders must be willing to stand up to them.
•Will they take on the "tax reform" to which they give bipartisan lip service? The economy would benefit from fewer tax brackets and lower rates at all income levels, as happened in the reforms sponsored and passed by Sen. Bill Bradley in the mid-1980s. But, in order to get there, all kinds of present "tax expenditures" — subsidies, loopholes, and benefits favoring specific sectors, companies, and economic activities — would have to be dumped. (The same goodies are provided at Washington-state level to Boeing, Microsoft, and other local powerhouses which profess their love for free enterprise as a concept but simultaneously demand the bounties of state subsidies in the conduct of their own businesses).
If Obama and the Congress are really serious about reforms, which, at the same time, would return many billions of dollars to the federal revenue base, they will reduce current tax breaks associated with health care and home-mortgage deductions, as well as deductions for interest paid and for purposes deemed useful at one time or another, including those devoted to home energy conservation.
There is no reason, for instance, that mortgage interest above a certain level should be claimed as a deduction. Many countries, including Canada, have no mortgage-interest deduction whatever. There's a present crazy focus on whether taxpayers making "over $200,000 a year" or "over $250,000 a year," depending on Obama's most recent formulation, should be taxed more heavily. Instead, the focus should be on making rates for everyone lower, removing loopholes and deductions, and thus fostering growth both in the economy and in the federal tax base. Loopholes and deductions, in any case, confuse the issue of who is rich and who not. Without them, tax evasion would immediately become more difficult for the wealthy in particular. Real reform would make current debate about raising or cutting taxes irrelevant.
•Will they make changes in government organization which make good sense but which are opposed by entrenched interests? LBJ, enjoying a huge congressional majority, attempted and failed to merge the Commerce and Labor Departments into a single economics ministry. Later the Post Office Department was removed but never truly privatized. Will Fannie Mae and Freddie Mac be abolished and their assets liquidated? They contributed greatly to the 2008 financial collapse and, with taxpayer backing, have hindered efficient functioning of the housing market over many years. This undertaking will consume a lot of time but should be started now in order to demonstrate White House and congressional seriousness.
Will the Gang of Twelve, including our own Sen. Patty Murray, be successful in framing an acceptable bipartisan package later this fall? Much wil depend on the seriousness of Obama's proposals in a few days. If they amount to partisan boilerplate, lack specificity, or continue his blame-Congress-and-everyone-else themes of the past 60 days, it will make congressional negotiators' work more difficult. But if he steps up as national leader and presents serious proposals with a sense of purpose, the Gang of Twelve will operate within a more promising context.
The Gang of Twelve has its own internal problems to solve. Some of its members, including Murray, are best known as fierce partisans. But it you apply the It Took Nixon to Go to China analogy — that is, if you believe that fierce partisans in fact have the best chance of bringing their fellow partisans to consensus solutions — then this could be a group to get something done. None, it is clear, will want to embrace the alternative of arbitrary spending cuts imposed externally.
But back to the matter raised by Stuart Jenner, the unfunded public-pension liability issue. It is perhaps illustrative of how our system works. In good times our elected officials made pension commitments that, in later times, they could not keep. But they had made those commitments to organized groups who at the same time provided them with political support and money and, so, it was easier to avoid dealing with by postponing the hard decisions to a later judgment day.
Social Security and Medicare began as far more modest programs than they are today. Various "reforms" over the years always were accompanied by sweetening expansions of coverage which added to their overall costs. Now there are too few working to pay for the many retired. As with the public pensions, there are powerful organized groups which resist necessary changes. Given our huge overall public debt overhang, the problem must be dealt with — Medicare first, since it in far more fragile financial condition that Social Security.
It's not just Congress on the spot. Europe, too, is dealing with similar previous commitments which cannot now be financed. The 2008 financial crisis here spread quickly and has exposed the vulnerability of our financial systems, economies, and public budgets.
Locally, everything we do now — including such big ventures as the deep-bore tunnel, Sound Transit light rail, and other pending capital projects — must be begin with the question: What level of debt will be incurred for what level of public benefit?
These are questions that we should have been asking all along. Now we have no option but to do it. Message to political candidates: Don't run for office unless, if elected, you are prepared to say no as well as yes.
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Comments:
Posted Sun, Aug 28, 9:47 a.m. Inappropriate
Without quibbling about the details, it all sounds perfectly reasonable. Unfortunately, both R's and D's are more interested in "winning" than they are in governing.
The cynic (realist) in me says the Gang of Twelve has, at best, about 1 chance in 5 of succeeding at anything other than blowing a lot of hot air and wasting everyone's time.
Posted Sun, Aug 28, 2:52 p.m. Inappropriate
Thanks for all the food for thought. The president is running out of time to show strong leadership on the budget, but now is a good opportunity.
Military pork has a long and proud tradition, one that will not be easily broken. During the Washington administration, the Federalists recognized the need for a Navy, though they struggled to get it through Congress over the objections of the Democratic-Republicans. In order to insure a broad base of support, the Federalists spread naval production out all over the country, so that as many members of Congress as possible would have a navy contract in their district or state. It was a political calculation and probably necessary, but this decision did raise the cost considerably.
I am a believer in a strong military, but I think it's clear that the Pentagon budget could be reduced considerably without detriment to American military commitments. In order to do so, it is necessary for the executive branch to be able to make decisions about base closures, weapons acquisitions, etc. without undue control from Congress. I have no idea how this might happen.
Posted Sun, Aug 28, 2:54 p.m. Inappropriate
Very good piece, thank you. It would be interesting to speculate on which senators in the Gang of 12 are likely to seek reelection. I doubt if Murray will run again and that would tend, maybe, to make her more "statesmanlike" in this endeavor. Kerry is also unlikely to run again and the remaining senator (Baucus?) may or may not.
Posted Sun, Aug 28, 6:56 p.m. Inappropriate
In all seriousness, the military budget can absorb large cuts. Do we really need a sub orbital, radar blank, carbon fiber rocket to deliver a bomb anywhere in the world in 1 hour? Sorry, I had to google the name because the project is so wasteful: Falcon Hypersonic Technology Vehicle 2 (HTV-2).
I remember reading the story online, and the only thing the press had to say was "Oh, too bad, 150 million dollar POS went in the drink...laugh."
Sad.
Posted Sun, Aug 28, 8:56 p.m. Inappropriate
TVD really needs to get out into the country and talk to ordinary Americans, rather than Beltway types, who are suffering in this jobs and foreclosure and no-growth crisis. His and the chattering class's focus on the deficit is astonishingly out of touch with the economic problems facing the masses of Americans. Ben Bernanke, Bill Gross, and many other mainstream economists and business leaders have been pleading for strong stimulus measures to get us out the rut that's leading to a hopeless future for Americans of all ages. How many times do experts have to point out that the deficit is not the cause of our current economic woes? I'll provide the link again to Gross's excellent article, "America's debt is not its biggest problem."
http://www.washingtonpost.com/opinions/americas-debt-is-not-its-biggest-problem/2011/08/10/gIQAgYvE7I_story.html
I'll also point out again that contrary to what TVD says, there are no easy solutions that policy analysts agree on to curb the growth of overall health care and Medicare costs. See this smart discussion of controlling Medicare costs by Ezekiel Emanuel and Jeffrey Liebman. Shifting more costs to seniors, most of whom are near-poor is not the solution.
http://www.nytimes.com/2011/08/23/opinion/cut-medicare-help-patients.html?_r=1&ref;=todayspaper
Why doesn't TVD mention the Social Security fix favored by policy experts who understand the crucial importance of the program to today's seniors and to seniors of the future -- raising the level of income subject to the payroll tax? See this excellent Dean Baker article.
http://www.truth-out.org/why-president-obama-so-anxious-cut-social-security/1314019361
TVD, applying Social Security and Medicare cuts only to people under 55 is not only grossly unfair, such a proposal fails to recognize that Americans under 55 are going to need generous Social Security and Medicare even more than people currently in the program, because they have less generous or not employee retirement benefits and have even less savings than the older generation.
Sen. Murray and other Democrats who strongly defend Medicare, Medicaid, and Social Security are actually out there talking to their many constituents for whom these programs are vital. That's the opposite of cynical. And in fact, TVD, the Republicans do want, and have long wanted, to shrink, privatize, and even eliminate our social insurance programs. That's a political and historical reality. Those programs would never have come into being with Republicans in control and they would cease to exist in a viable form if Republicans had their way. Sorry, but that's the political and historical reality.
Posted Sun, Aug 28, 11:45 p.m. Inappropriate
Here's one pundit, God bless him, who escaped the Beltway and talked to ordinary Americans in Oregon about the central importance of jobs. As Willie Nelson said recently, people are more concerned about the ceiling over their head than the debt ceiling.
http://www.nytimes.com/2011/08/28/opinion/sunday/kristof-did-we-drop-the-ball-on-unemployment.html?_r=1&scp;=1&sq;=yamhill&st;=cse
Posted Mon, Aug 29, 12:18 a.m. Inappropriate
A couple of comments on TVD's article here that are worth highlighting in more detail.
First, TVD is correct that US military spending is out-of-proportion to the international threats. At the end of Clinton's second term, the US military budget was 3.0% of GDP; currently, it stands at 4.7% of GDP. China, who is supposedly our greatest military threat, has an expenditure of 2.2% GDP. Other western democracies in general have an expenditure of roughly 1.5-2.5% GDP. Furthermore, statistics for our military expenditures are further skewed since they fail to account for quasi-military functions like the Department of Homeland Security and the nuclear weapons and environmental restoration activities contained in the Department of Energy. As compared to total expenditures, the US spends 42% of the world's total budget for military expenditures.[1]
Second, by all objective measures the public-private combination of providing healthcare in the US is woefully wasteful and inadequate. The mis-allocation of national wealth towards health care is indicative of the capture of regulation and government expenditures by the politically well-connected. US health care expenditures are 17.6% of Gross Domestic Product (GDP) in 2009 based upon Health & Human Services data.[2] According to the OECD, the next most expensive country in the world is The Netherlands at 12.0% of GDP and France at 11.8% of GDP. Canada, for example, has expenditures of 11.4% of GDP.
As for an effective mechanism of providing healthcare, a study published in published in the Journal of the Royal Society of Medicine [4] indicates that the most efficient methods of providing for healthcare consists of the state-funded single payer systems. The top 15 countries in the study had a single-payer universal health care system; the bottom four countries – Germany, USA, Portugal and Switzerland – all depend more heavily on profit-based, private health insurance provided primarily through the employer/employee relationship.[5]
The authors surmise that the US system is unproductive due to the inherent failures of the free-enterprise system where the consumer is placed at a disadvantage, i.e. take-it or leave-it approach, in the transaction.
"Although theoretically a ‘Private’ system, such as the USA, relies on competition to reduce costs, but because of these inherent market failures of ‘asymmetric information’ and ‘adverse selection’ factors, there will always be inherent market weaknesses within the whole system,which may go some way to explain the differences in the observed cost effectiveness results of the USA and the UK."[4]
I agree in principle with TVD's appraisal of the situation with regards to cost and promises associated with entitlements. However, the current political climate with the Republican Party knowing that political points can be scored on Democrats whenever defense cuts are discussed, and this same party uncompromising on market-based solutions, there is very little chance of any of either of these solutions to the budget crisis being implemented.
Reference:
[1] http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures
[2] https://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_sheet.asp
[3] http://stats.oecd.org/Index.aspx
[4] "Comparing the USA, UK and 17 Western countries’ efficiency and
effectiveness in reducing mortality" Pritchart, et al
http://image.guardian.co.uk/sys-files/Guardian/documents/2011/08/07/JRSMpaperPritWall.pdf
[5] http://www.consumerwarningnetwork.com/2011/08/15/americas-health-care-system-at-the-bottom-of-the-heap/
Posted Mon, Aug 29, 12:41 a.m. Inappropriate
The article by Mr Gross is well worth reading. This paragraph stands out:
Having run up our credit card to keep on spending, we have reached market-enforced limits that force deleveraging. It is not the debt, however, but the lack of global aggregate demand that is at the heart of the crisis.
What does Mr Gross mean by "market-enforced limits that force deleveraging?" And is aggregate demand, or the lack thereof, the determinant of Mr Gross' investment decisions at Pimco? To find out, I did some additional Google research.
First, in April, Mr Gross bet against T Bills. (He bet inflation would go up, reducing the value of the bonds). So far that bet has not paid off, as noted in an article published August 2.
http://www.businessinsider.com/bill-gross-this-deal-does-nothing-and-we-still-have-an-unfathomable-66-trillion-in-liabilities-to-deal-with-2011-8?op=1
Reading this article, one wonders whether the Mr Gross who is cited as favoring increased aggregate demand is the same Mr Gross who is quoted in the Aug 2 article. Look at the first line in the second paragraph, it links to here.
http://www.pimco.com/EN/Insights/Pages/Kings-of-the-Wild-Frontier.aspx
In turn there's a link to his August newsletter.
http://www2.pimco.com/maintenance/IO_August_2011.pdf
This is well worth reading. Can anyone read this and not be scared out of their mind about the unfunded liabilities? The figure he cites is $66 trillion.
$66 trillion. 330 million Americans. That works out to 66 followed by 12 zeros, divided by 330 followed by 6 zeros, or $200,000 per person. Note: this is just Medicaid ($35 trillion), Medicare ($23 trillion) and Social Security ($8 trillion). It does not include lots of other promises that are not yet paid for at all levels of govt.
Basically, the ability of our government to run up huge deficits, never mind the unfunded liabilities, depends entirely on investors who are willing to buy the debt.
It sounds like Mr Gross does not want to be that investor. Who does?
Would anyone who dislikes what Mr Van Dyke writes about deficits and unfunded liabilities like to confirm they are 100% invested in treasury bills for their retirement and moreover are committed to using all of their resources to buy whatever remaining US Govt debt Mr Gross has not yet sold off?
Posted Mon, Aug 29, 4:01 p.m. Inappropriate
Jobs, Jobs, and more jobs.
That's the problem. Falling tax revenue will continue until people have a job. No corporation will invest all that cash unless they have customers. Without jobs this is a death spiral.
Taxes, there are plenty of easy fixes, no one who writes the laws wants that though. Health care same there too.
Why I continue to read the TVD articles is beyond me. Nattering nabobs of uselessness.
Posted Tue, Aug 30, 10:07 a.m. Inappropriate
"Locally, everything we do now — including such big ventures as the deep-bore tunnel, Sound Transit light rail, and other pending capital projects — must be begin with the question: What level of debt will be incurred for what level of public benefit?"
This is meant as a joke, right? Last month the Sound Transit board approved the resolution authorizing the East Link megaproject. The EIS submissions show they did not consider either the tax costs or the bonding levels that would be needed to complete it prior to rubberstamping that resolution.
Posted Tue, Aug 30, 4:53 p.m. Inappropriate
A couple followon comments.
Since I wrote this piece, President Obama has appointed Alan Krueger, a Princeton economist, as the new chairman of his Council of Economic Advisors---the third person to serve in that job in a three-year period. I have followed Krueger's work for many years. He is a labor-market economist who has specialized in the factors that do and do not create jobs in the economy. He clearly will be making a major contribution to Obama's upcoming economic speech, now scheduled for sometime next week. He also is a solid macroeconomist who is unlikely to propose short-term gimmicks which would cost money but not dent the unemployment rate. He's been at the Labor Department and Treasury in the past and understands the Congress as well.
Second, I am sympathetic to crossrip's comment about the Sound Transit board's approval of the East Link project without consideration of tax costs or bonding levels. Par for the course. Both Sound Transit and Metro
keep getting public money without public accountability. We keep paying for systems whose costs keep rising but whose claimed efficiencies are not documented. Elected officials need to pay closer attention.
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