Deficit Reduction - The Voters Will Need to Speak Clearly

The collapse of talks between Boehner and Obama on a "grand bargain" on the debt ceiling and future deficit reduction can be blamed on many things, but ultimately, the perceived self-interest of all parties makes such a deal impossible. There is no solution that will get enough Republican votes to pass the House that would also get enough Democratic votes to pass the Senate. To do so, would require months of preparation of public opinion the way that Ronald Reagan was capable of, to put pressure on legislators to accept a deal. A big part of the problem is that the President was so late to the game in proposing such a deal. The public has had no time to digest the implications. Republicans who were recently elected to reduce the size of government and resist tax hikes didn't see how this was in their or the country's best interests. Interestingly, it was only at the eleventh hour that the President put entitlement reform on the table, but given the structure of the Senate under Democrat control, I am certain he lacked the votes needed from his own party.

This is the result of divided government. Divided government is usually good, because it forces parties to compromise and means that only incremental change occurs. Two of the most execrable pieces of legislation from the last decade, Obamacare and the Medicare Part D drug entitlement, were passed during periods in which one party in control of the Senate, House and White House. However, we are now faced with an extreme problem of rapidly rising debt whose solution goes to the core of what we believe is the proper role of the federal government. The left believes we must increase the share of wealth consumed by government in the name of "fairness," with that wealth is redistributed through various entitlement schemes paid for by "taxes on the rich." Libertarians and conservatives, and notably tea party types believe that government has grown far beyond its constitutional limits and we must not only reign in its growth, but shrink the federal government for the sake of our liberty and prosperity.

These choices are stark. The Republican party and its Presidential candidate need to make the 2012 election a referendum on the issues of government size, constitutional scope and entitlement reform. The people of the United States, given a clear choice, will make the right call. But if Republicans lie, and say that this can be solved without pain to any group, especially those receiving entitlements, they will have failed the republic. We are at a tipping point, the choice will be ours to make. I look forward to participating in the debate.

The Debt Limit and the Constitution

In order to stampede a deal on the debt ceiling, various Democrats have cited the constitution (at their convenience) regarding the debt of the United States. Here is the specific language, from the 14th Amendment, section 4.

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

The language was intended to ensure that the victorious side, the Union did not repudiate its debt and reward its creditors and punish creditors who supported the rebellious South. So if the Congress fails to raise the debt ceiling, aren't they violating the constitution? Of course not. First, tax receipts are still flowing into the federal treasury. And there is plenty of revenue to cover the interest on the debt that has already been issued. In fact, tax receipts stand at 55 percent of expenditures. It would be up to the President to halt expenditures that required the issuing of fresh debt and ensure that interest on the debt is paid. The real question would be what would be cut. Obama could play with fire and cut social security payments for example, and blame the Republicans for not passing a tax on corporate jets. I would love to see how his re-election chances would fare then.

Further, the federal government holds considerable assets it could sell to pay down the debt. This is similar to an idea I saw floated for the Greek situation. In that scenario, the Greeks would issue bonds backed by real assets, islands, their airline, that bondholders could seize if the Greeks defaulted. Eventually, the United States is probably going to have to deal with its debts by selling off assets as well. The federal government sits on vast mineral deposits, national parks and other assets that will eventually be needed to deal with our own overhang of debt, just the way a family going through hard times might hold garage sales and auctions on eBay.

The federal government owns about 800 million acres of land. Could that yield $1000 per acre? Maybe, so there is an asset that might be worth $800 billion. Some of the land might fetch considerably more. The submarine base in Point Loma comes to mind as particularly pricey. The 1981 value of mineral rights held by the feds was once estimated at $800 billion in a 1986 research paper. Using the U.S. inflation calculator, that would be almost $2 trillion in today's dollars. The point is that the feds hold assets that might have to be sold to get the debt reduced.

Of course, the smart money will bet that we will inflate our way out of the debt, which help the well connected and harms the average American, but spreads the pain over time.

National Deficit - More Tea Leaves

Reading more coverage of the SOTU, I realized that I had dozed off at the precise moment the President said "high speed rail." Because of that, I was probably more charitable towards his speech than I might have been otherwise, because I missed all the shiny new spending proposals; shiny new trains and shiny new solar panels on our shiny new reflective homes to reduce global warming.

Meanwhile Paul Ryan hit exactly the right tone in his response, to which, I listened but can't remember anything except the realization that we are really screwed on the debt and deficit situations. Right on cue, the WSJ headlined that the deficit is actually worse than projected. It's like losing your home to a flood, only to find you've bought insurance from a phony outfit. So here is the even more disturbing picture:

WASHINGTON—The federal budget deficit will reach a record of nearly $1.5 trillion in 2011 due to the weak economy, higher spending and fresh tax cuts, congressional budget analysts said, in a stark warning that will drive the growing battle over government spending and taxation.
. . .
The forecast will no doubt frame the coming months of debate. The first real tests of Mr. Obama's spending priorities will come when the White House releases its 2012 budget Feb. 15, spelling out proposed spending increases and cuts.

Paul Ryan will be using the spending numbers to drive a limit on spending. The government is operating under a "Continuing Resolution," so any failure to compromise at least leaves spending at last year's levels. The good news is that failure means that spending won't go up. The bad news is that the deficit will continue to grow the deficit at more than a trillion dollars per year, as in $1,000,000,000,000.00. In fact the above graphic puts the deficit at $1.48 trillion, but for reasons that are still not clear to me, the debt will grow by closer to $2 trillion.

Meanwhile, fellow blogger and reader KT, points out some more disturbing news in the comments section of a previous post. Japan, the largest holder of U.S. government debt has just had its own credit rating cut. Bush's and now Obama's policies have us heading down the same road that Japan started on 20 years ago. Further, if the Japanese have further fiscal troubles would they not dump U.S. Treasuries, putting upward pressure on interest rates? That's an actual not rhetorical question, because I am not sure about all of the forces at work, but KT is sure they're going to sell.

The hour is late, we have to cut spending, Krugman be damned. Peggy Noonan bears repeating:

The second thing is the clock. Here is a great virtue of the tea party: They know what time it is. It's getting late. If we don't get the size and cost of government in line now, we won't be able to. We're teetering on the brink of some vast, dark new world—states and cities on the brink of bankruptcy, the federal government too. The issue isn't "big spending" anymore. It's ruinous spending that they fear will end America as we know it, as they promised it to their children.

Amen.

Christmas Recovery?

Various news articles I have read indicate that retail sales over the holidays are picking up steam, and the economy might be truly recovering. I certainly hope so, because there are a lot of hurting people who could use a job and a lot of business owners who desperately need more sales. My worry is that the nation at large will take this as a sign that we don't have underlying structural issues and monster debts that require near term action. The advantage of the great recession was that it focused the minds of voters on the causes of our travails and they responded rationally, moving the legislatures and the Congress sharply to the right with new members committed to fiscal responsibility.

Even if we do have a recovery, another recession is inevitable, because we have not repealed the laws of economics, and all economies have boom and bust times. Unfortunately, if we don't deal with the underlying deficits, liabilities and out of control spending of federal, state and local government that recession will come sooner than later and will be a depression, not a recession.

Meanwhile, if you are the beneficiary of what might be a temporary improvement in the economy, be careful about preparing for the next down turn. The importance of the Tea Party in focusing on out of control spending and pensions is needed more than ever, if the economy is truly improving.

The other thing to consider is that given the precarious state of the finances of many cities and states, massive default on obligations might precipitate another panic. I hope not, but we should be realistic and prudent about the current situation.

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.

Lost in all the Hubbub - Unemployment vs. Deficits

Little notice facts about unemployment and the deficit, Mr. Krugman, take note. Germany's unemployment rate fell to an 18 year low, in spite of, no, because of a budget deficit that is a paltry 4.39% of GDP.

Some interesting comparisons:



Note how high deficits do not seem to be correlated with preventing unemployment. Some of the nations most similar to the U.S. that have the lowest deficits also have the lowest unemployment rate. I'll be asking Mr. Krugman for a nomination for that prize.

Exit question: Which party is advocating more and larger deficits? This is all you need to know to vote Republican.

Projected U.S. Budget Deficits Under Obama

Updated Picture - U.S. Deficits vs U.K. Deficits

U.K. Budget Deficits as Proposed by Conservative Government

Projected U.S. Budget Deficits Under Obama

This is an update to my earlier post about the British government making the tough choices to pull back from the brink of de facto bankruptcy. Note how the differences in budget difficulties are not that great at the macro level.

The UK deficit is about 10 per cent of 2010-11 GDP. The US deficit was $1,294bn, or 8.9 per cent of GDP, in the 2010 fiscal year.

But the differences in response could not be different. Obama and the Democrats would increase the deficits if they could get away with it. More reason to kick them to the curb in November.

British Tea Party?

Well who would have thought it? First the Greeks go in for some austerity, then the Irish, French and now the Brits? The country that was the object of a rebellious party in 1773, is now on the bandwagon? From the UK Financial Times.

The UK’s Conservative-led coalition has announced the most drastic budget cuts in living memory, outstripping measures taken by other advanced economies which are also under pressure to sharply reduce public spending.
. . .
The UK cuts of £81bn ($128bn) over four years are the equivalent of 4.5 per cent of projected 2014-15 gross domestic product. Similar cuts in the US would require a cut in public spending of about $650bn, equal to the projected cost of Medicare in 2015.

What the heck is happening to Europe? Simple, reality is setting in. Things that can't go on, don't. One must ask if U.S. politicians that are elected this November will show similar fortitude and rise to the occasion. I especially like the way the spending cuts are being handled:

Declaring that “today is the day where Britain steps back from the brink”, George Osborne, the chancellor of the exchequer, revealed dramatic reductions to core departments over the next four years, a £7bn fall in welfare support and 490,000 public-sector job cuts by 2014-15.

All of the inchoate hatred inveighed against the Tea Party fails to respond to our central question: How is the current path of spending and deficit sustainable? Where is the plan to change the shape of this curve?

Even the rosy picture painted by the White House shows a deficit far worse than any ever produced by George W. Bush for every year in perpetuity after Obama was sworn in. How much more damage to the economy do we want to allow?

Note to Republicans, you better start showing you are as serious as David Cameron, or the Tea Party will be coming after you.

Disconnected on the Economy

Dang, do I have to give up this spiffy uniform?
Photo from Pat Dollard's blog.

Since we're on a car theme today, how are your shares of GM doing? Don't own any? Fail. You do, if you are a taxpayer.

Taxpayers likely to face initial loss on GM IPO-sources

The U.S. government is likely to take a loss on General Motors Co [GM.UL] in the first offering of the automaker's stock, six people familiar with preparations for the landmark IPO said.

KT points out that the domestic content of Obama's Iraq speech was disconnected from reality:

Hundreds of billions of dollars had been spent on precisely what he was suggesting and the results were horrible.

I remember sitting at the blackjack tables in Vegas many years ago and watching an obviously inebriated punter double down on a 5,4 hand while the dealer had a King showing. When the dealer inevitably relieved him of his chips, he loudly complained abut not getting his free drinks fast enough. This reminds of nothing so much as Obama's economic strategy.

Meanwhile unemployment is rising and there is little job creation.


Job creation is slow because of a few simple to understand facts.

1. Uncertainty. The unknowns of future regulatory policy and the impact of Obamacare are injecting uncertainty into the economy.

2. Housing slump. Many small businesses are tied to the real estate market. Businesses that serve the homeowner are often smaller ones. Further, small business owners use the equity in their homes as collateral for lending. Trying to prop up home prices only delays the recovery, because home prices need to fall so that new buyers can start fixing up properties and they can be properly valued for small business owners.

3. Future taxes. Expiring tax cuts, aka tax increases, are injecting fear into the economy.

Exit question: How does doubling down on deficit spending fix any of these problems?