Monthly Archives: May 2013

Debt Ceiling Revisited

Politics again attempting to link increases in the debt ceiling to “other” points in their party platform. Kissing or kicking the corporate cash (campaign) cow depends on the “R” or the “D” in front of a name.

Ah, but economic news is again pushing the debate farther into the future as the deficit shrinks with (still sluggishly) employment growth. U.S. Debt Ceiling: A Plan to Kick the Can? talks frankly about how “Better-than-expected fiscal numbers, and the prospect of a one-time transfer from the government sponsored enterprises (GSEs), have pushed back the date when the debt limit (to be reset to the level of indebtedness on May 19) is expected to bite starting in July/August until the fall.  The deficit now is running at a 4.5 percent of GDP pace, well down from 10.1 percent in fiscal year 2010.”

Top that up with the new CBO depicted here and we see all the hollering is pretty much for naught. In essence big money has been trying to change programs and policies to what they want to see…based on what turns out to be a false alarm.

Debt

The questions yet to be answered are how corporate tax reform will play into the quid pro quo sure to occur as part of the committee and floor debate? And how the effects of sequester cuts will impact the growth of the GDP and change the now falling deficit?

Now for the really important stuff: I’ll be on a short break while we sail north from the Caribbean toward Massachusetts/Maine. The trip should take a couple weeks, maybe a stop in Bermuda. Time for some sailing and fun. For faithful readers and re-posters thanks and I’ll be back on the net in a couple weeks!

US Austerity Impacts

A week late in my noting but Nouriel Roubini has put up a great summary of how fiscal cliff/sequestration is effecting economic growth in the U.S.

In his discussion The Trapdoors at the Fed’s Exit, he points out “The effects of fiscal austerity – a sharp rise in taxes and a sharp fall in government spending since the beginning of the year – are undermining economic performance even more.”

Some great discussion of the difficulties policymakers will have in tightening interest rates when that time comes in maintaining both economic growth as well as financial stability. It will take more than interest rates alone to achieve.

While discussing how carefully the course needs to be navigated he is quick to make the point this is not yet the time to begin constraining liquidity. I agree.

Disappearing Deficit

I’ve said it before but once again…Don’t listen to the politicians. Policymakers in DC continue to fight over how to curb the deficit in spite of it being a very bad idea until unemployment is much lower. But look…it is going away by itself… without their help.

May budget report

Budget Totals from The May 7 CBO Report

Well it’s not really going away by itself. The deficit is shrinking because people are slowly getting back to work, in turn making money, both adding to the federal tax receipts and reducing outlays required for substance and unemployment. Nice how that works. Take a look at the comments from this months CBO report:

“The federal government ran a budget deficit of $489 billion in the first seven months of fiscal year 2013 (that is, from October 2012 through April 2013), according to CBO’s estimates. That amount is $231 billion less than the shortfall recorded during the same period last year

Individual income and social insurance (payroll) taxes together increased by $184 billion (or 16 percent). Taxes withheld from workers’ paychecks rose by $99 billion (or 9 percent), mainly because of higher wages and salaries, the expiration of the payroll tax cut in January 2013, and increases (beginning in January) in tax rates on income above certain thresholds.”

Outlays for unemployment benefits declined by $15 billion (or 25 percent), mostly because fewer people have been receiving benefits in recent months.”

Of course there is a lot more, but economic improvements in short order solve both the need for spending and increased revenue to offset the deficit. People working… while policy makers sit idle.

The Debt Lie

I’ve talked of spending patterns under different administrations prior to the election and several times since. The common theme is the guys hailing smaller government and lower spending keep spending more and growing government.

Two days ago Paul Krugman posted Naive Fiscal Cynicism where he again critiques the “math” or (my view lack of math) regarding austerity programs sweeping Europe, the IMF, and US. But down in the article he hits on what I call the debt lie, breaking out a nice chart of the gross debt as related to the GDP. Proof of the point we’ve explored here.

Gross Federal Debt relative to GDP

Interesting how closely it resembles some posts here like “Keep Kicking This Horse“.

Or how Kevin Phillips in American Theocracy points out how policymakers created this debt monster by repeatedly cutting taxes, but one sect wants to fix it solely by cutting the safety net. Hmm.

But here’s Krugman’s take in comparing how the debt has added up relative to the GDP since the depression. Interesting how this doesn’t correlate with what the politic is saying at all:

“Between World War II and 1980, every US president left the debt ratio lower when he left office than when he entered. Reagan/Bush I broke that pattern; Clinton brought it back; then came Bush II. And yes, debt is up under Obama, but a depressed economy in a liquidity trap is precisely when you’re supposed to do that.”

Job Growth

I fully intended to explore Social Security and Medicare this week, but I’ve been caught up in preparing for an off-shore passage from the Caribbean to the US instead. Meanwhile the US economy has kept churning slowly forward without my input.Unemployment

This months jobs and unemployment news is mostly good. Not just because unemployment is down but because it went down while the size of the labor force and the numbers of the employed actually increased. Not always the case. Ed Dolan put up a good summary here with some simple data making the sometimes confusing… clear.

Entitlements–Social Security Fixes

After yesterday’s outing of “entitlements bankrupting the West” being spewed by one side of the isle, I ran across a good piece on EconoMonitor posted by Ed Dolan titled Is the Chained CPI the Right Fix for Social Security?

He puts up a great analysis of wealth distribution among seniors and discusses the impacts of the CPI adjustments to Social Security. He reaches beyond face value on the data being used among policymakers to justify the cuts. Part of his summary:

“When all is said and done, the economic arguments for switcing from the CPI-W to the chained CPI for inflation adjustment of Social Security benefits is a good deal weaker than it is often represented to be. We cannot really be confident that the chained CPI is a better approximation to changes in the cost of living of the elderly population than the CPI-W. In addition, switching to the C-CPI-U without adjusting benefit floors and caps could very well increase the inequality of income distribution among the elderly, which is already greater than for the population as a whole”

“The fact is, the proposal to switch Social Security to the chained CPI has much more to do with politics than with economics. In the current phase of the budget debate, the White House appears eager to assume the role of the reasonable party by offering to cut entitlements, in order to set up a contrast with a conservative opposition that is unwilling to consider even small increases in revenue. The administration apparently hopes that it can minimize the backlash from its core supporters by passing off the C-CPI-U a purely technical adjustment.”

After reading I see the biggest impacts of CPI adjustment being a negative one regarding income inequality…a theme becoming too common within todays policymaker options. Some great data in the article, good charts depicting poverty rates among age groups, tearing down much of the fiction behind support for the CPI adjustments.

As mentioned yesterday, there are a few pretty simple solutions for SS making it solvent for the long haul without enacting the CPI proposal. Recall that among the “entitlements” Social Security has a miniscule 1.6% projected growth relative to the GDP over the 74 year period studied…4.8% of GDP in FY2011 to 6.4% of GDP by FY2085” Radical changes are just not needed to fix a 1.6% shortfall.

Remove the Arm to Save the Finger?

New report from the Congressional Research Service–entitlements are bankrupting the west. Well it doesn’t really say that–but the headliner is making rounds.

Yesterday a former co-worker e-mailed a copy of the 15 Apr 2013 Congressional Research Service, Trends in Discretionary Spending. It was accompanied by commentary ” It’s entitlements that are bankrupting the West…like they have for other societies for the last 6,000 years…decrease defense, increase entitlements = the end”.

Attention getting, interesting, after reading the report, equally untrue. The report says no such thing. It does however point out Discretionary Spending as a percent of federal outlays is getting to be a smaller piece of the pie compared to Mandatory Spending and Net interest. Social Security and Medicare make up the bulk of mandatory spending. Other Mandatory Spending programs include Temporary Assistance for Needy Families, Supplemental Security Income (SSI), unemployment insurance, some veterans’ benefits, federal employee retirement and disability, and Supplemental Nutrition Assistance Program and let’s not forget the salaries of House and Senate members. But let’s look at the problem.

Discretionary spending is limited by the Budget Control Act of 2011 (BCA; P.L. 112-25) reintroduced statutory limits on discretionary spending by imposing a series of caps on discretionary BA from FY2012 through FY2021. That act was supported by the same party’s  now howling. Revenue is down following major tax cuts over the last few decades and the economic contraction. Mandatory spending indeed rose as a result of the recession and unemployment, mostly leveled off but is requiring an ever increasing share of the GDP each year.

The message I received was “we need to cut entitlements”, but I see it differently. If we want a bigger discretionary slice, the options are: Increase the size of the pie through economic growth thereby increasing overall revenue; Getting people back to work reducing Mandatory Spending; Undoing the tax reductions demonstrated in recent posts not to improve the GDP, capital investment, or general wealth, thereby increasing the overall revenue pie; Repeal the Budget Control Act of 2011 allowing policy makers to adapt to economic conditions as needed; Reduce Mandatory (entitlement) portion of the pie; or some combination of these and other options.

Ah but there is much more to the report. While some may have a personal, philosophical, or party issue with entitlements most solutions are pretty basic. Simple adjustments to Social Security such as increasing the tax by a mere 1% this decade and raising the payment ceiling pretty much solve the issue over the long haul. A little deeper still we find another report from the Congressional Research Service, Mandatory Spending Since 1962. There we see the real increases, ” Federal mandatory spending on health care is projected to expand from 5.7% of GDP in FY2011 to 17.2% in FY2085 according to CBO’s extended baseline projection.” Social Security is projected to grow from 4.8% of GDP in FY2011 to 6.4% of GDP by FY2085.”

Yes you read it correct. Social Security is manageable, we do not have an “entitlement” spending problem, we have a cost of health care problem. Direct from the CRS report “health care costs per capita have grown far faster than the overall economy.”….”Medicare and Medicaid spending grew from 4.9% of total federal outlays in FY1970 to 23.2% in FY2011. CBO baseline projections show further increases in federal health spending will cause the Medicaid and Medicare share of total spending to continue to rise.”

So the “entitlement” sky is not falling after all. But it is time to take a look at the cost of health care, the real driver of Mandatory Spending increases. Let’s get our costs for in line with other developed countries and this “sky is falling” problem disappears like removing a wart….while saving the entire arm, let alone the finger.