Thursday, November 11, 2010

Debt and Deficit - Leaks from the Panel

"Depend upon it, Sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully," or so says Samuel Johnson. Doing some reading about the math surrounding the Federal debt has done the same for me. First a little from the "Debt Commission." The leaders have leaked some of their recommendations, and they are challenging. But despite the immediate negative reaction and the sweeping nature of the proposals, they don't fully close the gap, the federal deficit would still be 2.2% of GDP in 2015.

Before I get into the details released by the commission's co-chairs Erskine Bowles and Alan Simpson, we should review the magnitude of the problem. KT recommended an article on Monty Pelerin's World that gives a sense of the magnitude of our debt problem:

If the Government confiscated everything, the social programs would still be $50 trillion short and the Government would still be bankrupt. Furthermore, no company or individual would be left with anything.
. . . The Federal Government has nothing left from their “gross pay.” Their “living expenses” actually exceeded their gross pay by $1.2 trillion last fiscal year. That is, they spent almost 50% more than they made. Comparable behavior is budgeted for the next ten years. . .The Federal Government is in what is known as a Debt Death Spiral. They are unable to pay the actual and implied interest on their debt. Hence, the unpaid balance is added back to the amount owed, making the problem worse next year.
The raw numbers are very bad. Federal spending for the last fiscal year was estimated at $3.55 trillion and federal receipts at $2.38 trillion, leaving a deficit of $1.17 trillion. Relating it to your family budget, this is like having a family income of $100,000, spending $150,000 and funding the difference with a line of credit on which you already owe $575,000. Except it's even worse, because that only includes the debt that is admitted to, according to the linked article above, the real value would be closer to $4,500,000, however, I am unable to independently confirm that figure.

Some pictures:

2010 Federal Outlays, Estimated.

Here's a summary of the $3.8 trillion in deficit reduction measures proposed by the leaders.
  • Gradually raise social security retirement age.
  • Various cuts in social security benefits.
  • More taxes on wealthier incomes (presumably for social security).
  • $410 billion in various discretionary spending cuts.
  • Earmarks - $16 billion.
  • Cut the federal work force by 10%.
  • $100 billion in Defense spending cuts.
Already the commission catching grief from right and left. Both Grover Norquist and Nancy Pelosi have criticized the preliminary recommendations. The full commission seems unlikely to vote for these recommendations. As you can see from the graphic above, there are few easy answers. I don't like all of the recommendations either, but it's time to get serious.

Assuming for a moment that all the recommendations were implemented, it still leaves the country with a huge overhang of debt that is only continuing to grow. Apparently, there is no combination of spending cuts and tax increases politically acceptable enough to solve this crisis.

Exit question: What's to be done?

Strangely enough, I think part of the answer lies in solving the immigration problem. More on that in another article.

1 comment:

  1. There's no limit to increasing taxes. The path to bigger government seems impossible to get off.