At the risk of sounding alarmist, the financial condition of America's government is in even worse condition than the deplorable state most people believe.
If the US attempts to restore public financial health through tax increases alone, in a few short years the odds are very high that a typical family earning $75,000 will be paying $29,000 more in taxes than that family now pays.
How is this possible? The federal budget deficit is huge, the national debt is crossing into financial no-man's land, state and local governments are on a long spending spree, government has been making "off the books" promises, and Social Security and Medicare threaten to consume enormous swaths of the economy.
First and foremost is the task of balancing the federal budget and bringing the national debt down to safer levels. Trimming the federal budget deficit by a mere 1% of GDP each year will run up the national debt because current deficits are running 9% of GDP - so deficits will continue to add to the pile of money owed for nine more years. Using conventional government economic forecasts, the country will not bring the national debt down to its current 60% of GDP for 12 more years. The debt to GDP ratio won't fall to a comfortable 30% until 2030. While this slow rate of deficit reduction is politically courageous, financially it is weak. It takes too long, risks more financial crisis, and requires taxes on a typical family to gradually increase to an additional $16,000 annually in 11 years.
And it still leaves much necessary public financial reform undone. The feds have run up another $5.7 trillion in promises for employee benefits for which nothing has been saved. Assuming no cut in benefits, that obligation will be paid off as those pension liabilities come due. If we make the simplifying assumption that taxpayers spoon that out evenly over 40 years, that will add another $2,300 dollars of annual taxes starting immediately.
There are more hidden surprises, too. State and local governments have run up big debts. If they are folded into the definition of national debt, and we pursue a limit of 60% of GDP, then this debt should be extinguished. If taxpayers pay it off over 40 years at 4% that will add another $1,000 to the typical family's annual taxes.
Fourth, like the federal government, state and local governments have also made promises to government employees beyond which they have been willing to save. This shortfall could be as high as $3 trillion. We'll use $2 trillion to err on the conservative side. Assuming this gets paid over 40 years, and is evenly spread across the country (which it is not) it adds another $800 to that $75,000-a-year family's taxes.
Fifth and sixth, Washington still has to deal with Social Security and Medicare. If we pay for the shortfalls there evenly over the next 75 years, and close that gap with tax increases, Social Security adds $2,700 and Medicare adds $7,800 in fresh taxes per family each year
To deal with these issues squarely and through tax increases alone means raising taxes on our typical US family by $14,600 next year and ramping that up to $29,000 of fresh taxes - on top of taxes already paid - by 2021.
What will this do to our typical family? Obviously, it will strangle their cash flow. Many are already dealing with mortgages they cannot afford, and retirement savings that are critically short.
Where is all this money going to come from? Ultimately, every penny comes from someone with an actual heartbeat. That narrows it down to individuals. Companies are merely paper tigers owned, worked, and supplied by live, flesh-and-blood people. The bottom line: only real people pay taxes.
The middle class and the poor will not escape lower standards of living even if politicians could stick the rich for the whole bill. Since rich people are the nation's primary savers, taxing the rich succeeds in depleting the nation's pool of capital. Without that investment, Americans will feel innovation dry up, smell the decay of slowing productivity growth, and watch the paint peel across the country.
One can safely bet that discretionary family expenditures of all kinds will feel the cleaver. Cuts will come in vacations, restaurants, clothing, cars, books, housing. More cuts will come from education, retirement and yes, maybe even medical care.
Paying those taxes will also take more sweat, more hours on the job, more output for each hour worked, more teen employment, more elderly employment, fewer stay-at-home moms. The 40 hour workweek - widely exceeded by salaried folks and nothing more than a distant dream for most small business people, is in jeopardy for hourly workers, too. And bet on a larger "under the table" economy.
For American families, it looks like the New Normal is just starting.
_____________________________________________
All numbers used in the analysis reported above are derived from government sources with the exception of state and local government unfunded liabilities. Government does not estimate these numbers, private sources do occasionally. Contact me if you would like more detail.
Thursday, September 9, 2010
Wednesday, July 14, 2010
Stark Doubts From A High-Wattage Brain
Luminaries in economics and business have been expressing concerns about America's financial future recently. They may not be household names, but they are well known in their fields. Among them are Carmen Reinhart, Ken Rogoff, Bill Gross, Mohamed El Arian, Stephanie Pomboy and, of course, Nouriel Roubini.
Now another high-wattage brain, who happens to be a global media billionaire, is expressing doubts about America's future, too. Starkly.
When the Wall Street Journal interviewed John Malone recently and asked about risks in the cable business he responded; "The concerns really tend to be much more macro: Is America going to make it, rather than are we going to make it? It's pretty hard. If the country doesn't make it, do any of us make it?"
He goes on to muse about illegally fleeing to Canada on a snowmobile trail.
This sounds a bit wacko. But this is not a man known for rash judgment
Now another high-wattage brain, who happens to be a global media billionaire, is expressing doubts about America's future, too. Starkly.
When the Wall Street Journal interviewed John Malone recently and asked about risks in the cable business he responded; "The concerns really tend to be much more macro: Is America going to make it, rather than are we going to make it? It's pretty hard. If the country doesn't make it, do any of us make it?"
He goes on to muse about illegally fleeing to Canada on a snowmobile trail.
This sounds a bit wacko. But this is not a man known for rash judgment
Thursday, July 1, 2010
The Other National Debt
Kevin Williamson of National Review Online has sharpened his pencil toted up the national debt numbers. He finds "the other national debt" to be 10 times the official $14 trillion.
Why? Because no one holds government to accounting standards remotely as stringent as those that business uses. Like so many entities; it can fudge, so it does.
His piece is both entertaining and sobering. Read The Other National Debt.
Or listen to him talk about the article in this radio interview on Mike Rosen's 850 KOA Denver.
These numbers are starting to sink in. Let's hope we take action before they sink us.
Why? Because no one holds government to accounting standards remotely as stringent as those that business uses. Like so many entities; it can fudge, so it does.
His piece is both entertaining and sobering. Read The Other National Debt.
Or listen to him talk about the article in this radio interview on Mike Rosen's 850 KOA Denver.
These numbers are starting to sink in. Let's hope we take action before they sink us.
Wednesday, June 30, 2010
Fear the Boom and Bust - A Great Rap!
This is the decade ordinary people will cease taking the economy for granted.
Check out this funny rap parody of two great economists, Keynes and Hayek debating the greatest economic question of their time - and ours - how to tame booms and busts.
Rap: Fear the Boom and Bust
For a wonderfully well written and remarkably balanced line-by-line commentary (and lyrics) visit the Daily Kos, of all places. And read the comments, too.
Smackdown: Keynes vs. Hayek
Both Keynes and Hayek would like to know how you build your government budget at MyGovSpending.com.
Check out this funny rap parody of two great economists, Keynes and Hayek debating the greatest economic question of their time - and ours - how to tame booms and busts.
Rap: Fear the Boom and Bust
For a wonderfully well written and remarkably balanced line-by-line commentary (and lyrics) visit the Daily Kos, of all places. And read the comments, too.
Smackdown: Keynes vs. Hayek
Both Keynes and Hayek would like to know how you build your government budget at MyGovSpending.com.
Tuesday, May 4, 2010
HARD THOUGHTS ABOUT SEMI-HARD DEBT
What in blazes is semi-hard debt? Semi-hard debt is made up of government obligations taxpayers are now expected to cover, but of which they are largely unaware. It's a termite colony inside taxpayers' wallets.
Semi-hard debt is composed primarily of retirement benefits government has promised its employees but has not saved.
It's a big chunk of change - about $8 trillion or $70,000 of additional government debt for a typical American family of three generating $75,000 of annual income (1).
Federal employees are responsible for $5.3 trillion(2) Because the books of state and local governments are a motley bunch, no one really knows how much they've run up.
It is not less than $1 trillion and some suggest that it could be $3 trillion. MyGovSpending.com is currently using $2.4 trillion(3).
For perspective, $70,000 per family is roughly equal to one additional college education for each.
The money is not yet spent... It promised to do so. Government employees are counting on them to do so. But in fact, this money has not yet slipped through government's fingers.
...but it is growing. This $70,000 for Mr and Ms Middle America is the amount necessary to invest today to grow large enough to make a stream of payments on many tomorrows. It is a "present value" of the retirement obligations.
So, if the money is not set aside today (it isn't) the amount necessary to make the retirement payments grows by the rate of interest each year. It increases like an unpaid mortgage.
Assuming an interest rate of 5%, that $70,000 taxpayer debt will be $73,500 next year, $77,175 the following year in addition to whatever new unfunded retirement obligations government promises
How Big is the Family Tax Hit? If taxes are collected tomorrow as they are today, the tax bill for Ms and Mr Middle America will rise by a minimum of $3,800 annually to pay it off(4).
Who Takes the Hit? Right now, all knowledgeable parties in officialdom expect taxpayers to pay up. Taxpayers, however, haven't been fully informed of this particular invoice.
Once taxpayers are knowledgeable parties, too; this being America, it seems unlikely they will simply plunk down the cash, shake hands, and walk away.
The legal requirement that taxpayers cough-up for semi-hard debt is certainly more compelling than it is for soft debt. Nonetheless, the case for taxpayers to pay semi-hard debt is not etched in stone as deeply as it is for hard debt.
_________________________
VIDEO: For a terrific 30 minute summary of underfunding of state pension, see the interview with Orin Kramer posted by the Financial Times. Mr. Kramer is a Democratic Party heavyweight, top tier businessman and chair of the New Jersey State Investment Council, which manages New Jersey's public pension funds. That site does not post direct links so: \
* Go to http://videoft.com/
* In the search box in the upper right corner type "Orin Kramer", select video in the box immediately to the right, click on the "Search" button,
* Click on the clip titled "Feb 18: Orin Kramer of the New Jersey State Investment Council (14m 21 sec)"
__________________________________________________________
Postnotes:
(1) Government has run up roughly $1,000,000 of unfunded liabilities for typical US family described in the article. Refer to post on this blog of 25 Feb 2010 entitled "Average US Family Owes $1 Million in Government Obligations. No Kidding." for details
(2) From 2009 Financial Report of the US Government, pg xiii, table entitled Nation By The Numbers, available from http://www.fms.treas.gov/fr/index.html.
(3) The Trillion Dollar Gap, Pew Center on the States, available at http://www.pewcenteronthestates.org/uploadedFiles/Trillion_Dollar_Gap_embargoed.pdf
The $3 trillion comes from Robert Novy-Marx and Joshua Rauh in NBER working paper No. 14343 titled The Intergenerational Transfer of Public Pension Promises available at http://www.nber.org/papers/w14343, and referenced in Barrons article of 15 March 2010 entitled The $2 Trillion Hole available at http://online.barrons.com/article/SB126843815871861303.html#articleTabs_panel_article%3D1. I expect to refine the $2.4 trillion estimate as the picture clarifies.
(4) To arrive at a $3,800 annual typical tax increase I make the courageously optimistic assumption that there are no further increases in unfunded liabilities and that current balances are paid off over a 50 year amortization schedule at 5% annual interest rate.
Semi-hard debt is composed primarily of retirement benefits government has promised its employees but has not saved.
It's a big chunk of change - about $8 trillion or $70,000 of additional government debt for a typical American family of three generating $75,000 of annual income (1).
Federal employees are responsible for $5.3 trillion(2) Because the books of state and local governments are a motley bunch, no one really knows how much they've run up.
It is not less than $1 trillion and some suggest that it could be $3 trillion. MyGovSpending.com is currently using $2.4 trillion(3).
For perspective, $70,000 per family is roughly equal to one additional college education for each.
The money is not yet spent... It promised to do so. Government employees are counting on them to do so. But in fact, this money has not yet slipped through government's fingers.
...but it is growing. This $70,000 for Mr and Ms Middle America is the amount necessary to invest today to grow large enough to make a stream of payments on many tomorrows. It is a "present value" of the retirement obligations.
So, if the money is not set aside today (it isn't) the amount necessary to make the retirement payments grows by the rate of interest each year. It increases like an unpaid mortgage.
Assuming an interest rate of 5%, that $70,000 taxpayer debt will be $73,500 next year, $77,175 the following year in addition to whatever new unfunded retirement obligations government promises
How Big is the Family Tax Hit? If taxes are collected tomorrow as they are today, the tax bill for Ms and Mr Middle America will rise by a minimum of $3,800 annually to pay it off(4).
Who Takes the Hit? Right now, all knowledgeable parties in officialdom expect taxpayers to pay up. Taxpayers, however, haven't been fully informed of this particular invoice.
Once taxpayers are knowledgeable parties, too; this being America, it seems unlikely they will simply plunk down the cash, shake hands, and walk away.
The legal requirement that taxpayers cough-up for semi-hard debt is certainly more compelling than it is for soft debt. Nonetheless, the case for taxpayers to pay semi-hard debt is not etched in stone as deeply as it is for hard debt.
_________________________
VIDEO: For a terrific 30 minute summary of underfunding of state pension, see the interview with Orin Kramer posted by the Financial Times. Mr. Kramer is a Democratic Party heavyweight, top tier businessman and chair of the New Jersey State Investment Council, which manages New Jersey's public pension funds. That site does not post direct links so: \
* Go to http://videoft.com/
* In the search box in the upper right corner type "Orin Kramer", select video in the box immediately to the right, click on the "Search" button,
* Click on the clip titled "Feb 18: Orin Kramer of the New Jersey State Investment Council (14m 21 sec)"
__________________________________________________________
Postnotes:
(1) Government has run up roughly $1,000,000 of unfunded liabilities for typical US family described in the article. Refer to post on this blog of 25 Feb 2010 entitled "Average US Family Owes $1 Million in Government Obligations. No Kidding." for details
(2) From 2009 Financial Report of the US Government, pg xiii, table entitled Nation By The Numbers, available from http://www.fms.treas.gov/fr/index.html.
(3) The Trillion Dollar Gap, Pew Center on the States, available at http://www.pewcenteronthestates.org/uploadedFiles/Trillion_Dollar_Gap_embargoed.pdf
The $3 trillion comes from Robert Novy-Marx and Joshua Rauh in NBER working paper No. 14343 titled The Intergenerational Transfer of Public Pension Promises available at http://www.nber.org/papers/w14343, and referenced in Barrons article of 15 March 2010 entitled The $2 Trillion Hole available at http://online.barrons.com/article/SB126843815871861303.html#articleTabs_panel_article%3D1. I expect to refine the $2.4 trillion estimate as the picture clarifies.
(4) To arrive at a $3,800 annual typical tax increase I make the courageously optimistic assumption that there are no further increases in unfunded liabilities and that current balances are paid off over a 50 year amortization schedule at 5% annual interest rate.
Tuesday, April 27, 2010
WANNA FLAT TAX? America Already Has It...By Accident.
Despite perceptions, the case is strong that taxes in America are distributed with remarkable evenness across income groups.
Families with up to $20,000 in cash income pay 26% of their economic income in federal, state and local taxes. Families earning between $75,000 and $200,000 pay 26% too. Those with cash incomes above $200,000 pay a modestly larger share of their income in taxes: 30%.
So, including the federal income tax and all other taxes beyond it as a package, the tax code overall is remarkably flat. There's no need for a new tax if its purpose is to include the middle class more.
Tax reform for simplification and to raise tax visibility (so taxpayers can make informed choices), continues to be important.
Federal income tax receipts are by far the most progressive piece of federal revenues, and also highly visible.
So it is easy to assume that the rich bear a very heavy burden of the cost of government relative to the rest of the population. And they do in absolute terms, but less so as a percentage of their earnings.
First, MyGovSpending.com looks at the picture from a holistic viewpoint. So we combine federal, state and local revenues. Federal income taxes amount to just 25% of government revenues, so its impact on the progressivity of the entire tax code is diluted.
The next big tax is payroll tax at 20% of government revs. These are actually regressive, and undo much of the progressivity of the federal income tax.
Sales taxes are 9% of government revenues, and are notably regressive. The rich pay a smaller portion of their income in these taxes because the rich save more and consume less, relative to their incomes.
Then there are corporate income taxes, other levies on businesses, and property taxes, too. These foot to another 21% of the government's cream.
Economists can quibble about who actually pays these. Economists we rely upon argue that 70% of the bulk of these taxes are paid by workers and 30% by stockholders. If one accepts that, these taxes have a regressive bent to them, too.
Then 10% government revenues are often thought of as "non-tax" revenues. These are proceeds from government-owned businesses, like the post office and lotteries. It also includes fines and fees of various kinds.
MyGovSpending.com forwards the argument that these revenue streams are owned by citizens as equal "shareholders" in government. To the extent these revenue streams are controlled by legislatures instead of retail level citizens, they qualify as taxes.
The rich DO bear federal income taxes disproportionately. By design.
Holistically however, American taxes are spread remarkably evenly across income groups. By accident.
____________________
Note, although this analysis indicates the tax code is much flatter than commonly assumed, that should not be taken to imply that the poor are unfairly fleeced. The next logical step, and one beyond the scope of this post, is to analyze who receives government spending.
See this excellent paper by Andrew Chamberlain and Gerald Prante of the Tax Foundation entitled Who Pays Taxes and Who Receives Government Spending for a look at that topic.
It is available at http://www.taxfoundation.org/publications/show/2282.html.
Families with up to $20,000 in cash income pay 26% of their economic income in federal, state and local taxes. Families earning between $75,000 and $200,000 pay 26% too. Those with cash incomes above $200,000 pay a modestly larger share of their income in taxes: 30%.
So, including the federal income tax and all other taxes beyond it as a package, the tax code overall is remarkably flat. There's no need for a new tax if its purpose is to include the middle class more.
Tax reform for simplification and to raise tax visibility (so taxpayers can make informed choices), continues to be important.
Federal income tax receipts are by far the most progressive piece of federal revenues, and also highly visible.
So it is easy to assume that the rich bear a very heavy burden of the cost of government relative to the rest of the population. And they do in absolute terms, but less so as a percentage of their earnings.
First, MyGovSpending.com looks at the picture from a holistic viewpoint. So we combine federal, state and local revenues. Federal income taxes amount to just 25% of government revenues, so its impact on the progressivity of the entire tax code is diluted.
The next big tax is payroll tax at 20% of government revs. These are actually regressive, and undo much of the progressivity of the federal income tax.
Sales taxes are 9% of government revenues, and are notably regressive. The rich pay a smaller portion of their income in these taxes because the rich save more and consume less, relative to their incomes.
Then there are corporate income taxes, other levies on businesses, and property taxes, too. These foot to another 21% of the government's cream.
Economists can quibble about who actually pays these. Economists we rely upon argue that 70% of the bulk of these taxes are paid by workers and 30% by stockholders. If one accepts that, these taxes have a regressive bent to them, too.
Then 10% government revenues are often thought of as "non-tax" revenues. These are proceeds from government-owned businesses, like the post office and lotteries. It also includes fines and fees of various kinds.
MyGovSpending.com forwards the argument that these revenue streams are owned by citizens as equal "shareholders" in government. To the extent these revenue streams are controlled by legislatures instead of retail level citizens, they qualify as taxes.
The rich DO bear federal income taxes disproportionately. By design.
Holistically however, American taxes are spread remarkably evenly across income groups. By accident.
____________________
Note, although this analysis indicates the tax code is much flatter than commonly assumed, that should not be taken to imply that the poor are unfairly fleeced. The next logical step, and one beyond the scope of this post, is to analyze who receives government spending.
See this excellent paper by Andrew Chamberlain and Gerald Prante of the Tax Foundation entitled Who Pays Taxes and Who Receives Government Spending for a look at that topic.
It is available at http://www.taxfoundation.org/publications/show/2282.html.
Wednesday, April 21, 2010
Quick take on a new paper from the Committee For A Responsible Federal Budget (CRFB) - A PREVENTABLE CRISIS: EXPLORING FISCAL CRISIS SCENARIOS FOR THE UNITED STATES
Sober-mindedness is a deeply embedded characteristic of the Committee for a Responsible Federal Budget (CRFB). There is an impressive array of former senior policy makers, deep thinkers, and assorted movers-and-shakers from both parties on its board.
The Committee released an uncharacteristically provocative short new paper entitled A Preventable Crisis: Exploring Fiscal Crisis Scenarios for the United States.
In the absent of extraordinary political compromise, preferably delivered as fast as one can buy a Whopper with Cheese, a financial crisis of unprecedented magnitude appears to be riding down upon us.
CRFB (pronounced "kurfba") notes that the jitters have begun. Financial markets are getting queasy about lending money to the US government.
So what's next? CRFB muses that we could muddle along as we have, with Washington lacking the political courage to address the problem. In fact, politicians can even make the problem worse by expanding entitlements, leading to a Catastrophic Budget Failure. Lenders cut off credit to the government, it cannot pay its bills, and public spending is sharply curtailed, pronto. Imagine the unemployment rate then!
Another path to the same end passes through inflation first. This path is widely anticipated among both professional and armchair economists. The Federal Reserve bows to political pressures to pump up inflation and print money to buy government debt and - presto - high interest rates detonate a cut-off of government borrowing and a fresh recession with no rescue in sight.
Or, the US could continue to borrow until the debt reaches such heights, and the interest costs become so burdensome, that Washington simply decides the pain of paying the interest is less than the pain of trashing the United States' credit score. It simply walks away from the obligations - an outright default.
CRFB concludes "...while most economists consider the worst case (default) to be unthinkable for the United States, we unfortunately live in an era where the unthinkable has become thinkable."
Carrying this line of thought to the next step beyond the paper's scope quickly leads one to ponder the impact on families and individuals.
How does widespread and lengthy unemployment affect families? How do curtailed defense budgets affect global stability, most immediately in the Middle East? How do tumbling public budgets affect retirees and children in school?
What calamity are we courting? What can individuals do to avert it? (One thought, let your federal elected representatives know what you think either by calling, emailing or via MyGovSpending.com.)
If the ship doesn't turn, what can ordinary people do to minimize the damage to their families?
How much damage will be done to you, your family, your country, your world?
What will emerge?
The Committee released an uncharacteristically provocative short new paper entitled A Preventable Crisis: Exploring Fiscal Crisis Scenarios for the United States.
In the absent of extraordinary political compromise, preferably delivered as fast as one can buy a Whopper with Cheese, a financial crisis of unprecedented magnitude appears to be riding down upon us.
CRFB (pronounced "kurfba") notes that the jitters have begun. Financial markets are getting queasy about lending money to the US government.
So what's next? CRFB muses that we could muddle along as we have, with Washington lacking the political courage to address the problem. In fact, politicians can even make the problem worse by expanding entitlements, leading to a Catastrophic Budget Failure. Lenders cut off credit to the government, it cannot pay its bills, and public spending is sharply curtailed, pronto. Imagine the unemployment rate then!
Another path to the same end passes through inflation first. This path is widely anticipated among both professional and armchair economists. The Federal Reserve bows to political pressures to pump up inflation and print money to buy government debt and - presto - high interest rates detonate a cut-off of government borrowing and a fresh recession with no rescue in sight.
Or, the US could continue to borrow until the debt reaches such heights, and the interest costs become so burdensome, that Washington simply decides the pain of paying the interest is less than the pain of trashing the United States' credit score. It simply walks away from the obligations - an outright default.
CRFB concludes "...while most economists consider the worst case (default) to be unthinkable for the United States, we unfortunately live in an era where the unthinkable has become thinkable."
Carrying this line of thought to the next step beyond the paper's scope quickly leads one to ponder the impact on families and individuals.
How does widespread and lengthy unemployment affect families? How do curtailed defense budgets affect global stability, most immediately in the Middle East? How do tumbling public budgets affect retirees and children in school?
What calamity are we courting? What can individuals do to avert it? (One thought, let your federal elected representatives know what you think either by calling, emailing or via MyGovSpending.com.)
If the ship doesn't turn, what can ordinary people do to minimize the damage to their families?
How much damage will be done to you, your family, your country, your world?
What will emerge?
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