SUPERCOMMITTEE FAILS - CURRENT BUDGET CAN REDUCE DEFICIT MORE THAN 'GO BIG'

The experts over at the Concord Coalition do good work on the federal budget.  They are budget hawks and well worth listening to.

They note that doing nothing will balance the federal budget (excluding interest costs) by 2014.

Doing nothing unleashes automatic tax increases and smaller spending cuts.  Past tax reductions are scheduled to expire as is the "doc fix" which temporarily increases Medicare payments to physicians.

The automatic tax hikes may be part of the reason that SuperCommittee Dems didn't negotiate.

Concord is promoting strict pay-as-you-go rules as a one path toward a budget fix. It's a piece Washington needs - crisis or no.

http://www.concordcoalition.org/issue-briefs/2011/1122/super-committee-gave-congress-cant

SUPERCOMMITTEE SELF-SABOTAGE?

Democrats want the SuperCommittee to fail, according to Steve Moore of the Wall Street Journal.  He spoke with four of the six Republican members and reports that the six Democratic members have not offered any serious entitlement reform - which is where the big bucks lie.

His sources say Democrats have been offering less than $1 of spending cuts for each $1 of tax increases.  The bipartisan Simpson Bowles commission last year, widely thought to be an excellent model for the SuperCommittee, came up with $3 of spending cuts for each dollar of tax increases. 

Moore explains that election year politics are getting in the way of a deficit reduction deal.  The logic is that if Republicans do not agree to a SuperCommittee deal, Obama can run against a "Do Nothing" Congress.  If the Republicans DO agree to tax cuts, that is expected to weaken Republican unity enough that Obama can romp to victory.  lET'S 

Previously federal, state, and local governments have put each family on the hook for $800,000 of government debt beyond the $1.3 million in taxes that a family earning $75,000 yearly will already pay over its career. 

Time is ticking toward the next financial crisis. The political clock is running much slower than the economic clock.

Could it be that representative democracy has run aground, laden with special interests, dreamy ideals, self-righteousness, and blind ambition? 

For this observor, more direct democracy is growing in appeal.

COUNTDOWN TO US BUDGET BLOWUP

How long before the US budget implodes?

It's an intriguing question.  If deficits of the current magnitude continue, at some point confidence will fail and higher interest rates will detonate the debt.

We'll have a financial crisis like the last, but without the reserves to cushion the pain. The US will have to get by on a balanced budget, with no time to adjust.  Recession will be on this economy like a teen on pizza.

Alice Rivlin is a person of extraordinary eminence among budgeteers with a mild left leaning bias. She is an alumnus of the Clinton administration - yet well respected across the aisle.  Paul Ryan has worked with her on his health care reform proposal.  

She reinforces fiscal conservative sentiment when she says: "I don't think we have very much time at all. We may get our comeuppance fairly soon. ...we're gonna decide we're not competent - this government does not work."[1]

The conclusion that readers of Ron Suskind's sympathetic look at Obama as President, Confidence Men, come to is that Obama has largely wasted his presidency on the deficit reduction score. In fact, he actually made the situation worse - Obamacare being Exhibit A.  Now, he seems to be running out the clock.  

How much precious time does the US have to right the budgetary ship?  Four staff economists at the International Monetary Fund took a look at the issue across various nations in their work FISCAL SPACE.

They conclude the ultimate debt limit is controlled primarily by two factors: 1) How fast the economy is growing - including inflation.  and 2), the level of interest rates. 

For example, if the economy is growing at 5% including inflation, debt is at moderate levels, and interest rates on that debt are 4%, then deficits can run at 1% of GDP without becoming unsustainable. 

If one takes the same situation, but debt is at high levels, people spook more easily. A small disturbance can push interest rates up fast, and kaboom, and the debt sprints explodes to an unsustainable level.  Once government's access to debt is cut off, unemployment will skyrocket and everything else swirls down drain.

The trick is to adjust the economy to run without that debt before it gets axed. It's not easy. So far, the body politic has retched at the mere thought of it. 

The IMF, Alice Rivlin nor anyone else knows how close we are to the precipice.  We might be a step, a hundred yards, or a mile.  But the global economy is moving in that direction.

What can you do?  Write your elected officials at every level of government whether they be friend or foe.  Or call them.  Tell your friends.  Influence elections.  Vote for candidates that have detailed plans to lower deficits.

And control what you personally can control.  Save as much money as possible for yourself and your family.  You will need it later more than now.

Is this viewpoint nuts?  Let us know.

---

[1] from Committee for a Responsible Federal Budget (CRFB) seminar on Go Big, from 21 Sep 2011, 

20 minutes into Panel 1.  

SUPERCOMMITTEE POKER FACE - Citizens to be Dealt a Poor Hand?

The Congressional SuperCommittee set up as part of last summer's debt ceiling agreement has the power to right the America's finances. It is due to report on 23 November. So far members have been extraordinarily tight-lipped as to progress.  

Six Democrats and six Republicans sit on the committee. Not all of them are known to be eager to do a deal. 

If they fail to agree to measures that close deficits over the next 10 years by $1.2 trillion, then automatic spending cuts take effect that are projected to do the same.  Those cuts leave Social Security unscathed and hit Defense hard.

If the SuperCommittee fails to come to any agreement, expect confidence in the US to deteriorate rapidly. Falling stock prices are distinct possibilities. The Fed may see its ability to suppress higher interests fade, with growth stopping impact.  Alice Rivlin, former Clinton budget director, says, "I think we may be facing a double dip recession".

On the other hand, if the SuperCommittee succeeds in a "Go Big" deal of $4 trillion in 10 year deficit reduction, expect a surge of near euphoria.  Stocks could rebound marvelously and justifiably.  Confidence would strengthened across the globe.

More likely, than outright failure or clear success, however, the SuperCommittee will do just enough to get by. It'll squeak out $1.2 or $1.5 trillion in deficit reduction.  It'll not reform entitlements or taxes in any meaningful way.

Economic queasiness will continue to reign - until the next financial squall.

Related Resources:

http://crfb.org/document/going-big-could-improve-chances-success

http://www.thefiscaltimes.com/Articles/2011/10/16/Super-Committee-Battles-Deadlines-and-Doubts.aspx#page1

PUBLIC SECTOR EXPECTS TO TANK UP ON SQUEEZED FAMILIES Off-Off Election Year Tax Increases - The Path of Least Resistance

(I've submitted the following editorial to one of my local newspapers, The Vail Daily. The basic points have broad application wherever you pay taxes)

State and local tax authorities are asking voters to raise taxes again. They have presented it as a nickel and dime proposal.

Those nickels and dimes will be spread over time. When valued today, they total $11,600[i] per Eagle County household. 

Broken apart, the local school district wants $9,400; the local fire district wants $700,  State Senator Rollie Heath of Boulder wants another $1,500, also for the public K-12 industry[ii]. 

Should Mr. Heath's five year tax hike become a permanent tax increase, the present value cost of the three ballot measures balloons to $43,000 per household[iii]. That's big money for ordinary families.

These measures have some 'hidden charges', too. At the Colorado Public Employees Retirement Association (PERA), fast and loose benefit increases during good times are now coupled with losses from aggressive investing during bad times. That devilish duo opened a pension shortfall of $12,026 per taxpayer family[iv].

PERA is trying to make up its losses by shooting out the lights in the stock market.  If it fails, taxpayers are ultimately on the hook for the missing money.  

Local bureaucracies have made big money mistakes right here at home, too. Taxpayers now have expensive, excess boom-era buildings to pay for. Public sector folks are often terrific people, but management practices seem intentionally designed to suppress employee initiative and productivity.  Low productivity is expensive.

Then there is the power imbalance between rulers and ruled. Taxing authorities have zero tolerance for people who do not perform up to their expectations. Any doubt? Divert some of your taxes to a better cause and see the reaction.

On the other hand, if a taxing authority does not fulfill a taxpayer's reasonable cost and quality expectations, that individual citizen has no effective recourse. None.

And, of course, taxing authorities have great power to influence elections. They can call votes in off-off years - like 2011 - when turnout is expected to be low. A small but fired-up group of tax recipients can easily swamp the broader, more diffuse general interest. 

Local governments also have the big budgets, consultants, salaried leadership, paid staff, employee leverage to push for ever more money. The lonely taxpayer, however, is on her own.

Given this unbalanced relationship, it is not surprising that government spending has grown much faster than the rest of the economy for generations. Public expenditures have increased from 10% of GDP to 38% over the last century[v] - through a continual stream of "small" tax increases driven by politically opportunistic special interests.

A typical family earning $75,000 of cash income annually will pay approximately $1.3 million in taxes over its working career[vi]. 

Beyond that $1.3 million tax load, Washington, state and local governments have piled on another $100,000[vii] of national debt per $75,000 income family.

There's more. The same gang mentioned above has run up an additional $70,000 in unfunded government employee pension liabilities[viii]. 

Brace yourself for the big hit. Washington has "arranged" that each family and their descendants will pay $600,000 (today's value) in benefits for Social Security and Medicare[ix].  

It all tallies up to $770,000 in unfunded public liabilities per family. Oooph!  Richer families are on the hook for more, poorer families for less[x].

Throw in the demographics of aging and it is easy to build a muscular case that financial pressure is only starting to build...both globally and in Eagle County.

No wonder growing numbers of taxpayers feel like they are locked in a careening car with a drunk driver. 

Regardless of the outcome in November, taxing authorities are likely to face ever more scrutiny from increasingly sophisticated, value seeking taxpayers.  

Rising demands for lower costs, higher quality and more individual self-determination will certainly stress these traditional public institutions. Their most determined defenses are unlikely protect them from reform forever.  

The days when bureaucrats can expand their share of society's wallet simply by saying "trust us" are rapidly drawing to a close.  That's been tried and found wanting.

---

[i] The cost of tax increases are often presented as one annual payment.  Unless there actually is only one annual payment, the cost is more.  Financial analysts calculate how much that stream of payments is worth today assuming one can earn a return on money invested today. 

            Evaluating a tax increase based on one annual payment is analagous to buying a car knowing only what one monthly payment would be.  It is also important to know the price of the car. The Present Value (today's value) of the tax is the price of the tax, like the price of purchasing a car.

            Note: only humans with heartbeats pay taxes. The fact that businesses are taxed at higher rates does not reduce individuals' tax burden. Individual citizens pay taxes on businesses in addition to those levied specifically on individuals, too, through reduced compensation for employees, higher prices for customers, and lower profits and higher risk for business owners.

            To the extent businesses compete out-of-county those businesses become less competitive as relative taxes increase, shifting jobs to more efficient tax jurisdictions.

[ii] Eagle County School District, Eagle County Colorado Ballot Issue 3B, is a permanent tax increase, that does not increase with inflation. 

            The Eagle River Fire Protection District, Eagle County Colorado Ballot Issue 5A, proposed tax increase is for seven years and not capped at a fixed dollar amount. The author valued this income stream as one that increases with inflation. 

            Colorado Ballot Proposition 103, the Rollie Heath Tax, is a five year tax increase with no fixed dollar cap.  The author valued this income stream as one that increases with inflation. 

[iii] If the Rollie Heath tax becomes permanent, its cost to taxpayers jumps far beyond the five-year edition of this tax, largely because the tax is assumed to increase with inflation. For present value purposes, long-term inflation-protected Treasury bonds are assumed to be used to fund the tax liability.  They currently are generating record lows yields, requiring a large initial investment to fund the tax, hence the greater value (or cost) of the tax today.

[iv] Colorado PERA shortfall is as of 31 Dec 2010 from  Colorado PERA Summary Annual Financial Report for the fiscal year ended December 31, 2010, page 4. The number of Colorado households is calculated as Colorado 2010 population from http://quickfacts.census.gov/qfd/states/08000.html accessed during the week of 25 October2011 divided by 2.7, an estimate of population per household.

[v] Calculated from US Bureau of Economic Analysis data,  NIPA tables 1.1, 3.1, 3.2, 3.3.

[vi] MyGovSpending.com estimates. Based on economic income, not cash income.

[vii] Federal data from BEA NIPA data.  State and local data from the Census Bureau.  Per household calculations from MyGovSpending.com.

[viii] Federal data from US Treasury, 2010 US Government Financial Report, pg xi, state and local data from Pew Center for the States, The Trillion Dollar Gap. Income adjusted per family calculations by MyGovSpending.com.

[ix] Present value of Medicare and Social Security shortfall from US Treasury, 2010 US Government Financial Report, pg 172, Table 6, Update from 2010 to 2011 and per family disaggregation calculations by MyGovSpending.com.

[x] From https://www.mygovspending.com/advanced/Revise_Progressivity?ss=369 accessed on 20111003

Obama Supporter and Former Union Leader Andy Stern Believes President Made a Mistake by Not Pushing Simpson-Bowles Deficit Reduction Plan.

At a confab of heavy hitting federal budget players a couple of weeks ago, the most frequent White House visitor early in Obama's administration, his confidant and advisor, Andy Stern, said the President made a mistake by not supporting the Simpson-Bowles budget plan of late last year. 

"That was our best opportunity at a moment in history to do something."

He blamed himself for not voting for the plan, as well as those across the aisle including fiscal conservatives Paul Ryan, Dave Camp, and Jeb Hensarling.

Simpson Bowles would have lowered tax rates, simplified the tax code, and cut spending.

The Andy Stern comment comes at about 1 hour and 50 minutes into the Panel Two discussion, available at http://www.c-span.org/Events/Leaders-Urge-Deficit-Reduction-Committee-to-quotGo-Bigquot/10737424299/

DEBT CEILING DEADLINE TASERS D.C. PROCRASTINATION

Pols Get Busy with Budget Numbers

On 2 August, the US Treasury expects to run short of cash.  Both sides fear a US Government default if the debt ceiling is not raised in time. 

Vice President Joe Biden is attempting to shepherd a group of Senators and House Members toward a budget deal that keeps the government borrowing. 

Public deficits have been chronic since the US Bureau of Economic Analysis began its tally in 1929.  Washington is quaking at the thought of changing its "don't worry, be happy" tax and spending habits. But change they will. Those policies have gradually metastasized over the last 80 years into a lifetime tax of $1.3 million for a typical US family and unfunded public liabilities of $800,000 in addition.

With concern swelling last year, President Obama appointed the Simpson-Bowles commission to recommend a fix.  Contrary to near universal expectations, the team produced a remarkable work product.

It recommended wholesale reform of the corrupted US tax code.  In return for closing tax breaks and straightening the twisted economic incentives, the Commission would lower tax rates significantly.

Further, Simpson-Bowles grasped the famous third rail of Social Security and Medicare. It recommends cuts to senior subsidies and increasing related taxes, while boosting benefits to the poorest of oldsters.

The Commission's plan makes progress reducing the federal deficit to 1.5% of GDP by 2020 from 10% last year.   

Obama did not endorse Simpson-Bowles.  On 13 April the Administration issued the President's Framework, staking out a separate budget position.

That Framework does not change Social Security. Attempting to control medical costs, it goes beyond Obamacare in shifting more power away from the public and to a beefier Medicare bureaucracy.

Notably, the President supports sweeping tax reform and lowering corporate income tax rates.

The President's Framework cuts deficits $2.5 trillion over the next 10 years, versus Simpson Bowles cuts of $4.0 trillion. That's from a baseline of $9.4 trillion in deficits the President first proposed in February.

Paul Ryan, chair of the House Budget Committee, reforms more.  His plan cuts Washington deficits by $4.0 trillion between 2012 and 2021. And it does this while reducing the nation's tax burden by $610 billion.

Senior subsidies are at the core of the nation's self-destructive financial trajectory.  Ryan tackles Medicare by changing the program from a free all-you-can-eat buffet to a fixed government payment toward seniors' health insurance. Most importantly, he caps the growth in taxpayer costs per beneficiary to inflation.  Of the three leading budget plans, Ryan's proposal addresses medical costs most squarely.  

Ryan's plan is a greater agent of change than the other two. His youth-oriented budget puts more of the boomer generation's cost on the boomers themselves. That reduces the burden on younger people. It offers the best hope of broad prosperity for the middle-aged and the young.  

Each of these three prominent proposals agree on important points. All favor major reform of the tax code. All make attempts at controlling medical costs.  All cut spending.  Regrettably, all continue to run deficits for a decade, too.

The current round of budget action is expected to go to the brink. Former President Clinton remarked, “If we defaulted on the debt once for a few days, it might not be calamitous.”  Expect wonderful political theatre.

This observer suggests that if you do not play a role, you will be written out of the script.  Contact all your federal, state, and local elected officials with your opinion. Do it early. Do it often.

Regardless of the outcome of the current negotiations, intense budget debate is here to stay. And that is healthy for democracy.  Citizens are learning that public sector finance is too dangerous to leave to the public sector.

Sources: US Bureau of Economic Analysis, MyGovSpending.com, the Committee for a Responsible Federal Budget, Wall Street Journal


(This article first appeared in the June issue of Smart Girl Nation.)