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The State Of Our Nation

The State Of Our Nation. “Arguably, the biggest threat facing the U.S. today is our own Fiscal Irresponsibility…

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The State Of Our Nation

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  1. The State Of Our Nation • “Arguably, the biggest threat facing the U.S. today is our own Fiscal Irresponsibility… • Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our domestic tranquility and national security.” • David Walker, former Comptroller General of the U.S; President, Peter G. Peterson Foundation www.vteh.org 1

  2. Who Are VermontersFor Economic Health? • VEH is a grassroots, citizen-led organization, founded in 2007. • Our Mission is simple: • To Promote Economic Health • and • Fiscal Responsibility • in Vermont 12/09 2 www.vteh.org 2

  3. This Presentation Will Cover: An Overview of our Recession Employment Demographics Deficits and Debt Structural and Policy Risks and Exposures Note: Within this presentation includes one presented to the Vermont House Ways and Means Committee on January 6, 2010 www.vteh.org 3

  4. An Overview: Why This Recession Is Different “Balance-sheet recession”: Deleveraging of historic levels of public (government) and private debt Long-term structural U.S. fiscal deficits (entitlements) Disrepair of Municipal and State finances Historic Housing & Commercial real estate losses Uncertainty: Taxes, regulations, health-care and credit Monetary crisis and competitive currency devaluations Global competition for capital, trade, productivity & mfg. Geo-political risk; social unrest; & long-term unemployed www.vteh.org 4

  5. Employment

  6. The state of U.S. Jobs America has added no private sector jobs for the past 10 years There are 6 applicants for every 1 job available Between 2001-2007, 40% of jobs created were tied to the housing sector. These jobs aren’t coming back. Household debt service to disposable income reached 130% in 2008, straining an economy whose GDP is 70% driven by consumer spending Manufacturing capacity utilization is at a low of 67% www.vteh.org 6

  7. 1981 vs. 2007 Recessions: U.S. Monthly Employment Declines After 28 months, employment back to pre- recession levels 1981 Recession Approaching 28 months & we haven’t even turned upward on employment 2007 Recession - Months into Recession - www.vteh.org 7 Source: NBC Meet the Press, 12/13/09

  8. A Different U.S. Recession;A Different Employment Recovery Projected U.S. unemployment rates 2011 10/09 2009 2015 2020 8.4M jobs lost since recession began; 1M discouraged workers; U6 rate = 16.5% 125,000 jobs per month needed just for population growth Source: John Mauldin, The Mother of All Jobless Recoveries, 12/14/09 www.vteh.org 8

  9. Innovation, Productivity & its Job Market Impacts U.S Manufacturing Employment (as a % of U.S. work force) U.S. Manufacturing Output (as a % of GDP) Source: Bureau of Economic Analysis; Bureau of Labor Statistics. www.vteh.org 9

  10. A (Scary) Employment Picture Today’s employment, at 129.5 million, is the same level as in 1999. During this 11-year span, the working-age population has risen 29 million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. "Not only that, but consideration must be taken that in 2009, we had a zero policy rate, a $2.2 trillion Fed balance sheet and an epic 10% deficit-to-GDP ratio. You could not have asked for more government stimulus. Yet employment tumbled nearly 5 million in 2009." www.vteh.org 10 John Mauldin, 2/5/10

  11. Job Growth this past decade: Private-Sector: 0%Federal Government: 18% (Millions) Total Federal Employees 24% Increase Civilian Agencies (Ag., Justice, Treasury, Edu. etc) Defense 9% Increase U.S. Private-sector job growth 2000 - 2009 : 0% Increase 2000 2005 2010 (Gov’t: Full-time equivalent employees; Excludes Postal Service & uniformed military) OMB; Bureau of Labor Statistics www.vteh.org

  12. No Vermont Private Sector Job Growth Between 2000 – 2007 (just prior to our recession), Vermont had no private-sector job growth (In thousands) Source: Vt Dept of Labor 12/08 12 www.vteh.org 12

  13. Vermont’s Private vs. Public Sector Dilemma www.vteh.org 13

  14. Student Enrollment Down - Employment and Costs Up 108,000 20,000 106,341 18,876 106,000 19,000 104,000 18,000 102,000 100,000 17,000 98,000 16,000 15,783 94,116 96,000 94,000 15,000 1998 2005 2001 1997 1999 2000 2002 2003 2006 2004 Student s = -9.1%; Teacher and Staff Growth = +20.8% Students Teachers And Staff Source: Summary of the Annual Statistical Report of Schools (SASR) FY 1997 - 2008 2008 12/09 14 www.vteh.org 14

  15. Demographics

  16. The Baby Boomer Tsunami At nearly 30% of total U.S. population, Baby Boomers, born between 1946 & 1964 and now age 42 to 60, totaled an estimated 78.0 million. Boomers began collecting Social Security Benefits in 2008. Social Security is now paying out more in benefits than collecting in revenues The first of these nearly 80 million Boomers will begin collecting Medicare Benefits in January, 2011 Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 16 www.vteh.org

  17. U.S. Age Distribution: 2006 Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 17 www.vteh.org

  18. Government will account for more than half of all U.S. Health-Care spending in 2011 % Private spending 17.3% GDP 7.2% GDP % Public (Medicare, Medicaid, Veterans, States, etc) 2011: The 1st of 80M baby boomers turn 65. About 10,000/day thereafter. www.vteh.org 18 Source: Centers for Medicare & Medicaid

  19. Top Five States by Percent Baby Boomer Population: 2006 Source: U.S. Census Bureau, Population Estimates as of July 1, 2006 19 www.vteh.org

  20. VT’s Population Growth Is Less Than Half of the National Average www.vteh.org 20

  21. VT Retirees Double In 25 Years While The Work Force Shrinks Over 65, (Retirees) Age 20-65, (working age) Total Population Age 6-18, (school age) Source: Center for Research on Vermont, Art Woolf. (Indexed to 2000 = 100) www.vteh.org 21

  22. Deficits and Debts

  23. An Explosion ofWorld Debt vs. GDP“Financial Deepening” ($Trillions) 2007 Financial Assets Include: $195 1980 $55 $12 $10 356% % of GDP 119% www.vteh.org 23 Source: Harvard Business Review, Sept. 2008

  24. The President’s 2011 Budget$2 Trillion of Tax Increases $250K+ of Income: $380 Billion 28% Deductions: $291B Limits on $200K+ of Income: $209B Capital Gains Rate: $105B Source: 2010 White House Office of Management and Budget www.vteh.org 24

  25. The President’s 2011 Budget:U.S. Budget Deficits:A National Security Threat? (In Billions) 1990 2010 2018 Despite $2 Trillion in added tax increases, the President’s budget still calls for $5 Trillion in added debt over the next 5 years (2010-2015) -$1.6T Source: 2010 White House Office of Management & Budget; Peterson-Pew Commission; (years 2016 – 2018) www.vteh.org 25

  26. Federal Spending &Revenue as a % of GDP (% of GDP) WW II Spending 2010 - Deficit - Historic avg. +/- 20% Revenue Historic avg. +/- 18% 2010 Public; Total Debt to GDP = 55%; 85% 2020 = 90%; 120% (Historic Avg. +/- 40%) - Projected - Source: Office of Mgt & Budget, May 2009; Peterson-Pew Commission, 2009 www.vteh.org 26

  27. “Off Balance-Sheet” U.S. Indebtedness Medicare, Medicaid, & Social Security (Excludes State, Local Gov’t & Fannie Mae, Freddie Mac Liabilities) ($Trillions) $12 trillion $12 trillion $10 trillion *Medicare becomes insolvent in approx. 6 years; Jan. 2010, S.S. now cash negative Source: Bloomberg, 9/25/09, Peter G. Peterson Foundation www.vteh.org 27

  28. Enormous Overhangs & Risks ($Trillions) $1.25 trillion in monetized Fannie Mae/Freddie Mac home mortgage debt by the Federal Reserve Bank (printing of money to purchase debt) Proj. Fan/Fred Losses: $400B Monetized Treasury debt: $300B Realized Fan/Fred Losses: Proj. FDIC Losses:$100B $112B www.vteh.org 28 Source: WSJ 12/24/09

  29. The State of Vermont’s Indebtedness $70M ($40M to stimulus) $300M $400M $1.6B (teacher & state employees) (Net of Stimulus $) $470M $466M (Champlain Bridge, VT State Hosp. & other road/bridge costs not included) 29 www.vteh.org 29

  30. Structural and Policy Risks and Exposures

  31. U.S. Interest Rate Risk ($Billions) (5) (1) Increase in borrowing costs with removal of Fed. purchases of mortgages; equal to one-half percentage point (2) Combined budgets of the Dept. of Education & Energy (3) Est. add’l cost of 2009 debt service with 2008 int. rates (4) Est. debt service cost in 2019; WSJ 12/16 (4) (5) U.S. debt payments due within a year; currently financed at a rate of 1% or less (3) (2) (1) $774B $1.9T $40B $80B $221B www.vteh.org 31 Source: NYT, E.L Andrews 11/23/09

  32. Sovereign Debt Levels of Advanced Countries (% of GDP) [Projected] Source: International Monetary Fund, WSJ 12/10/09 www.vteh.org 32

  33. The Debt Binge will continue: Global Supply of Government Bonds will break records in 2010 Morgan Stanley est. net issuance will equal 16% of overall government-bond market in the U.S., 11% in the euro zone and 26% in the U.K. Greece, Italy & Belgium already have debts of more than 100% of GDP. Many others will follow in 2010. Japan’s Debt/GDP ratio is roughly 200% % Net Issuance of overall Bond Market www.vteh.org 33

  34. How the $27 trillion U.S. Debt Markets have changed since 2007 “Securitization” or repackaged loans were hardest-hit & (once) accounted for about 50% of consumer lending. Consumer & corporate credit markets have shrunk about $1.5 trillion since 2007. In 2005, over 6 billion credit-card offers were made. This year, just 1.4 billion. The result of tighter lending: Consumers spend less; businesses hire & invest less. % Change in lending since 2007 U.S. Treasurys Gov’t Mortgages Credit cards Auto loans Home equity loans Sources: Federal Reserve; Industry & Financial Mkts Assoc.; Dealogic; FTN; WSJ 12/8/09 www.vteh.org 34

  35. Commercial Real EstateNext ‘shoe to drop’“100’s of billions in losses” $534 billion of the $800 billion in commercial real-estate loans maturing between now & 2014 are “underwater.” $1.4 trillion in (weaker) corporate bonds & loans mature between now & 2015. Richard Lefrak estimates we’re only in the “2nd inning of a commercial real-estate storm.” ($Billions) *Capital markets & interest rates will be pressured www.vteh.org 35

  36. The state of Housing In 2010, 2.4 million more U.S. homes could be lost to foreclosures, while prices drop 10% 1 in 4 U.S. home mortgages are underwater If one in five of these households defaults, losses to banks and investors could exceed $400 billion. An equivalent loss as that suffered in the savings and loan debacle in the late 80’s. WSJ: 12/10/09 www.vteh.org 36

  37. The stateof ourStates & Municipalities Net of stimulus funds, the Center on Budget & Policy Priorities estimates total state deficits of $255 billion through fiscal 2011. An average of $5 billion per state. Without more federal aid, state budget cuts will shave nearly 1% point off U.S. GDP; eliminating almost 1 million jobs through 2011. Of the $787 billion stimulus package, states were allotted about $250 billion of this total. Municipalities & state’s tax-capacities & debt levels have hit or nearly hit saturation while safety net, infrastructure, and unfunded pension costs rise. www.vteh.org 37

  38. Composition of Federal Spending 2008 1968 4% SS 13% Med. 21% All Else 29% All Else 31% 6% SS 21% Defense 46% Defense 21% 8% www.vteh.org 38

  39. Mandatory vs. Discretionary Spending 1965 2008 Mandatory Discretionary 34% 38% Discretionary Mandatory 66% 62% Mandatory spending is authorized by law rather than annual appropriations. www.vteh.org 39

  40. Foreign Holdings of U.S. Debt to the Public 2009 1990 19% 50% 50% 81% www.vteh.org 40

  41. Triffin’s Dilemma China’s Foreign Exchange ReservesApprox. 75% Dollar-Denominated ($ Trillions) $2.4 Trillion "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our ... goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage.“ - President Obama, February 3, 2010 $400 Billion Source: People’s Bank of China, WSJ 12/5/09 www.vteh.org 41

  42. Vermont’s Dangerous RelianceOn An Ailing Federal Government 34% $ in Billions 32% 33% Source: VT CAFR -2009 01/10 42 www.vteh.org 42

  43. Vermont’s Progressive(and highly risky)Income Tax Structure Top 1% pay about 1/3 of taxes 100% 304,254; 100% 98% 185,534; 61% Start here, move clockwise… 26% of Taxes Paid, 2,113 Tax Filers; 0.69% of Filers 91% Paid 121,827; 40.04% 38% Paid, 6,970 Filers; 2.29% 75% Paid 58,415; 19.20% 49% 15,200; 4.99% 60% 27,632; 9.08% www.VermontersForEconomicHealth.org 43 Top 5% pays about 50% Source: Vt. Comprehensive Annual Financial Report, 2007

  44. Losses in income and tax-revenues are accounted from Vermont’s top 1% of earners (Millions) (C) (A) • $598M decline in total Adjusted Gross • income by all Vermonters • (B) $36M decline in total net income taxes • paid by all Vermonters • $614M decline in total Adjusted Gross • Income by Vermonters earning $200K+ • (about 1% of all taxpayers) • $37M decline in total net income taxes • paid by Vermonters earning $200K+ (B) (D) 2007-2008 2007-2008 www.vteh.org 44 VT Dept. of Taxes; VT Economy Newsletter

  45. Current Use Program:(88% reduced assessments)Opportunity Costs Explode (Millions) (C) (B) $37.4M in foregone education property taxes (C) $49M in total Vermont opportunity costs (B) (D) 2.2M acres of enrolled land in Current Use Program (E) 6.6M acres of total land in Vermont; 1/3 of all Vermont land is enrolled in Current Use, as it grew 3.3% in 2009 and continues to grow. To what end? At what cost? In lieu of what development, and decided by whom? (A) (D) (E) Opportunity Costs 2008 www.vteh.org 45 Source: VT Dept. of Taxes (PVR)

  46. Private vs. Public Sector Share of Union Workforce;A Political Exploitation? Private: 2009 48.6%; 7.49M workers; 7.2% of total private-sector Public: 2009 51.4%; 7.91M workers; 37.4% of total public-sector • CA, NY, MI, NJ, IL & PA account for 50% of the 15.3M union workforce vs. • having 1/3 of total workforce. VT union membership jumped 21% in 2009 www.vteh.org 46 Source: Bureau of Labor Statistics

  47. A Society CannotConsume and not Produce Vermont government payroll and employee benefit costs grew 70% between 2000 – 2007 Vermont school spending grew 60%, from $813 million to $1.3 billion between 1999 – 2007 Public-sector unions represent both entities Vermont per-capita income and inflation grew +/- 25% & Vermont’s private-sector job growth grew 0%, during these periods; 1/3 of Vermont land is enrolled in Current Use = No development. Source: Burl. Free Press, 3/10/08; Rut. Herald 2/1/07 www.vteh.org 47

  48. Life Cycle of a Superpower Competition: Share of World GDP 1820 1950 5% U.S. = 2% 27% U.S. China = 5% 33% China 65% Other 68% Other 2009 2020 - 2025 8% 24% U.S. 18% U.S. 18% China China = 8% 68% Other 64% Other Sources: IMF; Maddison; US Census Bureau; Financial Times 10/11/09 www.vteh.org 48

  49. “Blood, Toil, Tears and Sweat”“The multitudes remained plunged in ignorance of the simplest economic facts, and their leaders, seeking their votes, did not dare to undeceive them.” - Winston Churchill, 1940 For a copy of this presentation: tomlicata2@comcast.net “A Society Cannot Consume and not Produce”

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