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U.S. Debt & Deficits: A Budgetary Crisis

U.S. Debt & Deficits: A Budgetary Crisis. Dr. Dennis Foster 8/22/2012. Part I. The Problem. Debt:. Part I. The Problem. Deficits:. Part I. The Problem. Context? As % of GDP. Part I. The Problem. Part I. The Problem. Unfunded federal “liabilities” = $60+ trillion.

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U.S. Debt & Deficits: A Budgetary Crisis

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  1. U.S. Debt & Deficits:A Budgetary Crisis Dr. Dennis Foster 8/22/2012

  2. Part I. The Problem. Debt:

  3. Part I. The Problem. Deficits:

  4. Part I. The Problem. Context? As % of GDP.

  5. Part I. The Problem.

  6. Part I. The Problem. Unfunded federal “liabilities”= $60+ trillion The good news is that the people who are really going to be mad about this have not even been born yet.

  7. Part I. The Problem. Ever hear of business cycles?

  8. Part II. What is to be done? • The “fiscal cliff” scenario • Bush tax cuts expire • Expand AMT • Reduce Medicare reimbursements • Sequestration spending cuts • Expiration of some unemployment compesation • Some “Obamacare” taxes kick in • Net effect … ~$600 billion decrease in deficit. • … and decrease growth 0.5%. Another recession?

  9. Part II. What is to be done? • Simpson-Bowles • Spending cuts ($200 b/year) • Tax increases ($100 b/year) • “Public option” in Obamacare to costs • Reduce entitlements • farm subsidies, student loans • Rearrange Social Security • raise taxes, raise retirement age • Expect debt cut by $4 T. over 10 years • … means the debt will grow by $6+/- trillion!

  10. Part II. What is to be done? • Ryan Budget • Target spending to 20% of GDP. • details on cuts … • Target taxes at 19% of GDP. • Retool Medicare as central feature • CBO figures budget balanced in 2030 (!) • … debt grows until then, but shrinks as %GDP • … assuming no recessions for next 18 years.

  11. Part II. What is to be done? • Bush - Privatize Social Security • Gramm-Rudman-Hollings • Grace Commission • Obama - 2011 SOTU

  12. Part II. What is to be done? • What does the budget look like?

  13. Part II. What is to be done? • Where does the money come from?

  14. Part III. Why little/nothing will get done.

  15. Part III. Why little/nothing will get done. Lessons from Public Choice Theory • The study of collective choice using standard economic assumptions - people are rational and self-interested; incentives matter. • Politicians want to win elections. • To win, you must cater to various voter blocs. • To be successful, you must trade votes. • legal vs. illegal bribes • To minimize opposition, separate spending and tax decisions. • Concentrate benefits; spread costs. • exception - tax the rich (rhetorically) • Rhetoric is important. • Embrace the long run, but promote the short run. • The knowledge problem made manifest.

  16. Part III. Why little/nothing will get done. Lessons from Public Choice Theory • What should we expect from the budget “crisis?” • Politicians will claim disaster looms, or not. • Politicians will choose to do as little as possible. • even if events catch up with their choices; Greece … • Politicians will claim to have solved problems, when they haven’t. • What will happen? • A “sustainable” path will be found; it won’t be. • At the next recession, the magnitudes will be much worse. • more “European-like” • This may/may not follow a serious inflation problem. • At the time of crisis, we will have to accept pain.

  17. Part IV. Thinking outside the box. The 19% Solution

  18. Part IV. Thinking outside the box. A Balanced Budget Amendment

  19. Part IV. Thinking outside the box. Ron Paul - Would you opt out? • Pay some low rate . . . 10% • Take no government (fed’l) assistance. Gary Johnson - Balance now. • Cut subsidies & earmarks. • Reform entitlements. • block grants

  20. Part V. In the long run … Rethink the role of government • Recognize that government is crude, incapable,inefficient, wasteful, corrupt, immoral, unjust. • Adopt the notion that government should be as small as possible and as decentralized as possible. • Allow people to solve their problems voluntarily in an environment of property rights. • Embrace the free market as a mechanism that promotes diversity, mutual respect, individuality, and as the ultimate expression of democratic values.

  21. http://www.usdebtclock.org/ [8/16/2012]

  22. Sources • U.S. Treasury data on debt:http://www.treasurydirect.gov/NP/BPDLogin?application=np • St. Louis Fed FRED data base:http://research.stlouisfed.org/fred2/ • Public versus Gross debt:http://en.wikipedia.org/wiki/United_States_public_debthttp://en.wikipedia.org/wiki/File:Holders_of_the_National_Debt_of_the_United_States.gifhttp://www.treasurydirect.gov/NP/BPDLogin?application=nphttp://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2011:02:19-gross_vs_net_government_debt_--_a_tedious_topic_with_important_practical_consequences • Components of government budget:http://useconomy.about.com/od/fiscalpolicy/tp/US_Federal_Budget.htmhttp://en.wikipedia.org/wiki/United_States_federal_budget • Gross Domestic Product information and data:http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm • Debt data:http://www.fms.treas.gov/finrep11/citizenguide/fr_citizen_guide.html • Debt and deficits as a percent of GDP:http://www.npr.org/templates/story/story.php?storyId=112339032

  23. Sources • The “fiscal cliff:”http://www.convergentwealth.com/dollars-and-sense/shadow-fiscal-cliffhttp://en.wikipedia.org/wiki/United_States_federal_budget • Simpson-Bowles:http://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reformhttp://www.bloomberg.com/news/2012-06-14/in-praise-still-and-again-of-simpson-bowles.html • Ryan budget:http://en.wikipedia.org/wiki/The_Path_to_Prosperityhttp://blogs.wsj.com/washwire/2012/08/11/what-is-the-ryan-budget/ • Debate on Social Security:http://en.wikipedia.org/wiki/Social_Security_debate_in_the_United_Stateshttp://www.npr.org/templates/story/story.php?storyId=4164384 • Grace Commission on government waste:http://en.wikipedia.org/wiki/The_Grace_Commissionhttp://www.nationalaffairs.com/doclib/20060406_issue_078_article_5.pdf • Senate Republicans’ Balanced Budget Amendment:http://cnsnews.com/news/article/senate-gop-unites-behind-strong-balanced-budget-amendment • The CAP Act:http://www.corker.senate.gov/public/index.cfm?p=the-cap-act

  24. Sources • Gary Johnson on the debt and deficits:http://www.garyjohnson2012.com/issues/spending-and-the-deficit • The 19% solution:http://reason.com/archives/2011/02/14/the-19-percent-solution • Gramm-Rudman-Hollings:http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Hollings_Balanced_Budget_Act • John Stossel interviews Ron Paul on his “opt out” idea:http://www.youtube.com/watch?v=ZgIY4IxBSXM

  25. U.S. Debt & Deficits:A Budgetary Crisis Dr. Dennis Foster 8/22/2012

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