Category Archives: Deficit

Congressional Budget Office see $1.1 Trillion Deficit for 2012

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The Congressional Budget Office (CBO) yesterday forecast that the deficit for fiscal year 2012 will again exceed $1 trillion. The CBO has a reputation for shooting straight, so these numbers are not likely to have been spun. To put the deficit into perspective, that’s 7% of GDP, down from 9% in FY 2011.

Politicians could build confidence by setting a credible goal of running surpluses within five years. It’s a fascinating note of the times that people advocating such a goal are discounted as fringe elements.

Declining deficits are good news, but the financial improvement could prove to be too little, too late.

Washington took a big swing and missed with the SuperCommittee. That was its second golden opportunity to put the country on a sustainable financial track during the Obama Administration. It’s first strike was not poo-pooing the plan Obama’s Simpson Bowles Commission put together.

Mahathir says “West Needs to Go Back to Capitalist Basics”

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Mahathir Mohamed earned notoriety on a number of scores when he was prime minister of Malaysia from 1981 through 2003. He piloted his country deftly through the Asian financial crisis of 1997.

Never one to shy away from controversy, the Financial Times published his piece today titled “West needs to go back to capitalist basics“.

He refers to the current economic problems by saying, “…America and Europe became poor. The refusal to accept their impoverishment has resulted in their refusal to accept austerity measures…This simply aggravates matters.”

He is right that the West is refusing to accept its impoverishment. America and Europe have many powerful voices saying that there is an easy way out from under the mountain of debt.

These voices say that more debt is the answer; that it is necessary to buy time to restructure the economy. And that argument possesses persuasive power via its promise of ease.

However, the “borrow today, we’ll restructure tomorrow” argument lacks credibility. For most countries, the restructuring is too painful. It never comes.

Mahathir continues: “they (the West) must go back to doing real business, ie to produce goods and sell services”.

It is here where West resists. To preserve the standard of living of its people, the West requires either enormous productivity gains, or relatively lower wages. The former is practically difficult, though perhaps not impossible. The latter is politically difficult, although perhaps inevitable.

Mahathir’s career has been the feedstock for millions of arguments over the past three decades.

His recent thoughts urging the West to become competitive again, ring true to this observer.

Our Dearly Departed Golden Age

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Now we know how a Golden Age dies.

After suffering real recessions every three to five years prior to 1983, the US had 25 years of clear economic sailing. Only two short, shallow recessions interrupted until the 2008-2009 storm blew in.

I had a ringside seat. Watching the economy has been part of my professional responsibilities since 1981.

The good years started after the cigar-chomping Paul Volcker induced recession and stomped inflation. It was painful. And heroic. Reagan stood behind him. Then the economy bloomed.

Greenspan followed. With both luck and skill, he gave the world what it thought it wanted – steady growth, low inflation, and cheap money.

Unemployment was so low that an astute observor quipped; “Even people who shouldn’t have jobs, have jobs”.

Prosperity bred confidence. That confidence led to greater risk taking. When that risk taking paid off – and it certainly did – it morphed into a sense of financial invulnerability. Then both private and public institutions loaded their trucks with even riskier bets. Individuals did the same.

But, of course, eventually it was overdone. Wildly. The crash splattered blame everywhere. Borrowers and lenders. Public and private. Rich, poor, and middle class. Foreign and domestic.

Curiously, the most valuable lesson has not yet been learned. Few dare even to think it. Fewer still will speak it.

We have to take recessions. They are natural and necessary reminders that trees don’t grow to the sky.

AVERAGE US FAMILY OWES $1 MILLION IN GOVERNMENT OBLIGATIONS. NO KIDDING.

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Yep, as Americans, we are responsible for running up $1,028,000 of public obligations for the average family. No kidding.

First there’s the hard debt – government’s contractual obligations – in the amount of roughly $87,000 per family. That’s approximately half the value of the average American home. It’s more than chicken feed.

Then there’s the semi-hard debt – primarily retirement benefits for civil servants that their governmental employers have not saved. That’s almost as much, $73,000 per family. Taxpayers likely won’t fork over that money without a contest.

Then there are the best loved brands in government: Social Security and Medicare. They are slated to consume $368,000 per family more than tax revenues over the next 75 years. Beyond 75 years, the two programs will be short another $500,000 per family. (The Treasury, Social Security and Medicare Trustees Reports, GAO, Census Bureau, Pew Trust on the States have additional details if you’re interested.)

For perspective, it would take $1,028,000 per family invested today and growing to pay off government’s debts, deals, and perceived promises – federal, state and local — as they come due.

This amount is in addition to the taxes citizens already pay.

Every year the balance is not paid down it grows at the rate of interest – like an unpaid mortgage.

I make the heroic assumption that taxpayers will not be called upon to make good on any loans that they have co-signed. No FDIC problems, no bad TARP money, no further Fannie and Freddie losses, no student loan troubles, etc…

It is important not to exaggerate the problem. America can cut the total unfunded liability in half easily, simply by deciding the country is not going to pay Social Security and Medicare to anyone now roughly 8 years old or younger or to those not yet born. Simple, right? As a practical matter, yes. As a political matter, no.

Visit MyGovSpending.com/beginner/new for a view of your family’s total tax bill, it’s share of government spending, and its share of the deficit and the national debt.

The numbers are big. There’s not much time.

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Sources:
1) Federal “Debt Held by the Public” http://www.treasurydirect.gov/NP/NPGateway. State and local government contractual debt excluding debt issued by governments for private purposes is from http://www.census.gov/govs/estimate/0600ussl_1.htm
2) Unfunded federal employee retirement benefits from
http://www.gao.gov/financial/fy2008/08frusg.pdf Unfunded State and local employee retirement benefits from miscellaneous sources, soon to be updated with recent data from Pew Center on the States
3) Unfunded “entitlements” GAO, 2008 US Government Financial Report, pg 136, Table 5 and Table 6.

Government sources generally do not make estimates of current year data. MyGovSpending estimated current year data from the recent historical figures reported above using historical rates of increase.

Chamberlain Economics, LLC. provided the model for estimating of tax burdens by family to MyGovSpending, Inc. Unfunded liabilities per family were calculated at the same proportion to total unfunded liabilities as taxes per family are to total taxes.

Contact me for additional details.