April 16, 2014

A Non-Sexy Way to Cut Government Spending

Zachary Derr is an attorney working at the Governor’s Office of Economic Development. In his spare time he enjoys great food, skiing and rubbing shoulders with low-lifes on the disc golf course.

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Speculating on ways to save taxpayer money and curb the national debt has become a bit of a national pastime. The right wants to cut “entitlement spending” and the left has their sights set on defense and tax loopholes. Everyone agrees that we should do something. We’re stuck with lots of rhetoric, line drawing and politicians who largely maintain the status quo.

State and local governments are also slashing budgets and cutting back essential public services to save money. I would like to propose an idea that is not original and won’t solve the national debt. It’s simple, has been tried and tested and may even help our obesity epidemic. The idea: turn up the thermostats in government buildings in the summer. That’s it.

During law school I worked as an intern at the Department of Justice in Washington, D.C. My cubicle was underneath an air conditioning vent and I found many excuses to walk around and get warm. I eventually did what others in the office did: brought a sweater. Wearing a sweater indoors in August in Washington, D.C. struck me as totally absurd. I would leave my arctic cave at the office and enter the sweltering D.C. summer heat, dripping in sweat after my bike ride home. Other folks in the office had space heaters to keep warm. Space heaters are expensive; air conditioning is expensive. Who foots the bill? We do! Would you leave all the windows in your house open in the winter and turn on a space heater? In fact, sales of space heaters across America rise during the summer, to keep chilled office workers warm under the oppressive flood of artificially cold air.

Could we as Americans sacrifice our beloved suit coats and ties for the bottom line? Japan is a conservative society where businessmen have been rumored to mow the lawn in dark suits. Japan has turned the thermostats in office buildings up to around 82 degrees in the summer and convinced the businessmen to trade in their dark suits for short-sleeved shirts. If Japan can do it, we can too. As an employee of the State of Utah, I would gladly ditch my tie and change to a short-sleeved shirt in the summer. I think the public would forgive government buildings being a little warm and having a more relaxed appearance, knowing that they were saving money.

In fact, seeing the President and Congress dawning short-sleeved shirts during the summer would show the American people that our elected officials are willing and able to do the very thing we want: make sacrifices to pull together for the benefit of the nation.

If the federal government and state and local governments turned up the thermostats in government buildings to around 82 degrees during June, July, August and September and allowed employees to dress down a bit during those months, the government would save millions, if not billions of dollars on electric bills.

From the WSJ: “Republicans and Mediscare”

WASHINGTON, DC - APRIL 05:   U.S. Rep. Paul Ry...

Image by Getty Images via @daylife

The reality is that Medicare “as we know it” will change because it must. The issue is how it will change, and, leaving aside this or that detail, the only alternatives are Mr. Ryan’s proposal to introduce market competition or Mr. Obama‘s plan for ever-tightening government controls on prices and care. Republicans who think they can dodge this choice are only guaranteeing that Mr. Obama will prevail.

via Review & Outlook: Republicans and Mediscare – WSJ.com.

Also, “Why Gingrich has no chance to win the nomination for the White House.”

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While the world watches, the world’s largest debtor quibbles…

“The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,” Geithner said in a letter to congressional leaders.

via Geithner warns U.S. to hit debt ceiling by May 16 | Reuters.

Meanwhile, in Congress:

A Republican budget plan due to be unveiled on Tuesday would cut $5.8 trillion from U.S. spending over the next 10 years, a congressional aide familiar with the proposal said on Monday.

The plan, which would take effect when the next fiscal year starts on Oct. 1, is expected to propose sweeping changes to the Medicare and Medicaid health programs, as well as hard caps on government spending and tax cuts.

via US Republican budget plan would cut $5.8 trln in 10 yrs.

That’s what I call a good start.

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Adding up the Federal Balance Sheet

Click to see larger image.

Do you know your net worth? If you add up all your assets (cash, property, etc) and subtract all your liabilities (debts), do you know what you are worth?

As a person, your net worth on paper doesn’t really account for your intangibles, like personality, education, or dashing good looks. Just your value if you sold everything you own.

Now how about the United States?  What is the net worth of our “of the people, by the people, for the people” government? If we were to add up all the assets and liabilities, what would our country be worth (or owe, as the case may be)?

The question matters. Though we hear a lot of talk about deficits, earmarks, and budget cutting, there is a world of difference between what politicians usually deal with–discretionary spending–and what is the biggest debts on the US balance sheet–the entitlements.

Let’s look at the stuff we hear a lot about: cutting  the discretionary spending in the federal budget. In reality, this is one of the smaller items on the federal balance sheet, but it’s the one that gets the most play in the news.  For example, look at this visualization by William Gross:

Look at “Non-Defense Discretionary” on line three of this (extremely) simplified  federal budget. In 2011, non-Defense Discretionary items will make up just a quarter of the budget. Over the last 40 years, it makes up on average only 23%. I doesn’t change that much. In other words, when we hear about politicians cutting discretionary items, they’re just chopping at the leaves, but leaving the trunk relatively unscathed.

That trunk is the other 75% of the budget. It’s stuff that Congress doesn’t mess with, can’t mess with, or, and here’s the kicker, is afraid to mess with. We’re talking entitlements, defense, and interest payments on the debt the United States owes to creditors. This means Medicaid, Medicare, Social Security, the Departments of Defense and Homeland Security, and, of course, interest payments on debt to, increasingly, people who live overseas and have loaned the US government money.

Of those, the scariest, the piece of the budget that is the largest, and that is going to grow the fastest in the coming decades, too, is the entitlement part. It’s Medicaid, Medicare, and Social Security. And it’s not even funded. The Congress has promised these benefits to people without coming up with a way to pay for them.

Remember, were talking liabilities, here, and unlike Defense spending, which has been fairly constant over the last forty years, entitlements will grow at a rate faster than tax revenues.  Because they are unfunded, and because they will grow rapidly over the coming decades, the government will need to borrow to pay for them. As  a result, as they grow, they’ll be paid for with more debt, which will increase the size of the interest payments.

Check it as Gross explains the danger:

The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ­– it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.

Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.

What would happen if we threw in agency debt and student debt, too, liabilities that the federal government insures?  Add another $65 Trillion to the debt side of the balance sheet.

Oh, and what about the assets side? Well, if our GDP is $14.9 Trillion and our tax revenues are estimated at about 35% of GDP, then do the math: we’re on track to never pay down our debt.

Indeed, because entitlement costs are going to continue to grow, and faster than inflation, sometime in 2040, mandatory budget items will exceed government revenues (or taxes collected).

Ouch. As Gross says, were out Greeking the Greeks with our debt, here.

In the real world, when things get this bad for a company, or for a person, they become insolvent. Since were talking about a country here, and not just any, but one of the most successful countries, bankruptcy is not exactly an option. It would destroy the world economy.

Instead, Gross anticipates four avenues the government can take to diminish it’s debt problems, none very attractive, and none very wise:

  1. Contractual abrogation. In other words, it will stop paying its debts and honoring its contracts. Extremely unlikely.
  2. Speeding up and increasing inflation. Dramatically. He thinks this is likely, but not sufficient.
  3. Push down the value of the dollar. Already happening.
  4. Decrease Treasury yields to historic lows, penalizing savers, and hope not one complains.

Or they could just reform entitlements. Entitlements are the heaviest weight on the federal balance sheet, and they are the part that will grow over the coming decades. Get entitlements under control, and suddenly the federal balance sheet is more manageable.

Who’s going to take it on? It’s political suicide for any serving politician to take on entitlements, and I doubt any of them currently serving has the courage, or the brains, to figure out how to do it.

Maybe it’s something that takes a whole generation. Maybe it’s time for the Baby Boomers to step forward. As Michael Kinsley recently wrote in The Atlantic Monthly, maybe it’s time for the descendants of the Greatest Generation to step forward and take one for their kids. Maybe it’s time to take one for the team:

So what do you give the country that has everything? You give it cash. The biggest peril Americans now face isn’t Islamo-fascism. It’s our own inability to live within our means. It would be nice to give our country the wisdom and self-discipline to stop running up the credit card. And we should try. But it’s unlikely that we can remake the national character (including our own) in 19 years. What we can do is offer a lecture and a fresh start. We should pass on to the next generation an America that’s free from debt. Instead of ignoring it, or arguing endlessly about whose fault it is and who should pay for it, Boomers as an age cohort should just grab the check and say, “This one’s on us.”

(h/t to PIMCO)

Is the recession over, or are there more bubbles?

Deficit and debt increases 2001-2008
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I’m reading “Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown” by Wiedemer, Wiedemer, and Spitzer. They claim to have seen the current recession coming before it happened, the result of the popping of various bubbles in our economy, including in the housing and credit markets. Interestingly, and perhaps most frightening, the authors believe that things will get worse, yet. You see, while national leaders are talking about the recession like it’s the result of a down cycle in the market, just another downturn following the growth of the last few years, the growth they are promising cannot come about without either a new bubble–which must eventually pop–or dramatic increases in productivity. It’s a scary proposition they are prophesying, and while they believe there are ways to survive and even make money in it, the sheer size of the next bubble is terrifying.

As bad as the financial judgment of the private sector bankers and investment bankers is, even worse is the incredible irresponsibility and bad judgment of the public sector–the U.S. government. They have been involved in the biggest bad loan of them all: the monstrous government debt bubble. We can’t possibly pay it off. Our tax base in a good year is only $2.5 trillion. In a bad year, it’s less. The total government debt bubble will soon be over $11 trillion and rising rapidly to $15 trillion. Even if we directed 100 percent of our taxes to paying it off, it would take at least six years, assuming interest rates stay at their current incredibly low level. What if interest rates rose to 10 or 15 percent? We would have a hard time just paying the interest!

From “Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown,” p. 57.

I find it noteworthy that the authors, while damning political leaders for their irresponsibility in debt creation, do not pull punches for either of the two major parties. Both are at fault. As a good friend of mine likes to observe, both conservatives and liberals have done a good job of spending in recent years–they just spend for different things.

Maybe Economics 101 should be required for freshman Congressmen and Senators in addition to the other orientations for a newly elected politician takes office in the Capitol.  The basics of supply and demand, to say nothing of budgeting and spending, could be considered as important as ideological purity, if not more so.

The interior of the United States Capitol rotu...
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