Only your closest friends will stop you before you leave the house in an unflattering outfit. Maybe it takes a grown woman without an agenda to tell you to truth about US debt.
Here's an unbiased look. Please refrain from the temptation to shoot the messenger.
All links are to most current US government promulgated reports.
The Budget
We're spending $3.5 trillion dollars, and taking in $2.1 trillion in revenue. The $1.4 trillion we're spending beyond our means is our annual deficit, and is added to all prior year deficits. The total of all deficits as of last September 30 is $11.9 trillion. That amount, now just over $13 trillion, is our national debt.
Expenses
Almost 40% ($1.35 trillion of our $3.5 trillion total annual expense) is Social Security, Medicare and Medicaid.
All the money we spend on national defense is is just over 15.5%, and rises to 22%, when including all other security programs. Those two items are nearly 2/3 of what we spend.
The other third is non-security and other mandatory programs, like education, justice, commerce, state department and the like.
Income
Individual income taxes are just over 40% of all taxes. Corporate taxes are almost 7%.
Social security, medicare and unemployment taxes are the biggest chunk - just over 42%. By the way, if you think your social security taxes are put into the so-called "Social Security Trust Fund," think again. There is no trust fund. We spend that money. But we promise to pay you back. That promise is almost 40% of our annual expense.
Personalizing the Budget
I can see your eyes rolling back in your head. No one can think in trillions. So, let's put this budget in terms of your community. To keep the numbers easy, we'll say that your community spends $100,000 per year, and expenses are split up just like our Federal budget.
$38,500 is put aside for old age benefits. About 13% of your population is 65 and older.
$29,700 goes to education, agriculture, commerce, energy, justice, labor and the like..
$22,000 is for security. You live in a dangerous area, and you've been attacked within the last decade.
$5,300 is interest on loans you've taken out to finance the amount you've spent above your revenues in the past.
$4,300 was invested in your local banks, which nearly stopped making loans due to their bad condition last year. You've been repaid about half the amount you lent them so far.
Reviewing the Budget
Right off the bat, almost 40% of your budget is spent for old age benefits for 13% of your population. .
You may be able to cut a little here and there, but nothing is as anywhere near as significant as that expense. Even if you cut your security budget in half, it wouldn't be as much of a benefit as cutting the old age benefit by just one-third.
But you know that this is a "sacred cow." Just look at the civil unrest in Greece and Spain for an idea of what you can expect when you cut benefits that you've promised - even if you can't afford them.
The fact is, though, you can't continue to promise 40% of the budget to 13% of the population. Someone, at some point, is going to have to tell your community the truth.
The Truth
Old age benefits began during the Great Depression. At that time, US life expectancies were 60 years of age, and benefits were available at age 65. Now, US life expectancies are 77.2, and benefits are still payable at age 65. The age at which benefits are available has not moved, despite the increase in life expectancy of 27.2 years.
When old age benefits began, there were 42 workers per retiree. In 1950, there were 16. Now there are 3.3 workers per retiree.
Some Possible Solutions
1. Age at which benefits are available must be increased in relation to the increase in our life expectancy.
2. Those of us who have provided comfortably for our retirements must consider reduction, or even elimination of our benefits for the viability of the program.
3. The option for a portion of benefits to be available for young workers to invest in capital markets.
4. You decide. Those of us who are parents and grandparents have the responsibility to make tough decisions in order to keep this program viable for the next generations. Yes, we paid into the system. Yes, a promise was made. But we're paying out much more than we're taking in, and no expense is anywhere near that of Social Security, Medicare and Medicaid. It's our responsibility.
We need to acknowledge the problem and fix it.
As always, I welcome your comments and suggestions.
Showing posts with label national debt. Show all posts
Showing posts with label national debt. Show all posts
Thursday, June 10, 2010
Wednesday, February 17, 2010
The Most Important Financial News You Haven't Heard
Health care costs are 17% of our Gross Domestic Product, and growing at 12% per year. At this rate, in 10 years, health care will be 50% of our GDP. No health care legislation on the horizon.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession. No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I. National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending. Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009. Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion.
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year. How does that compare to our historic levels of Debt/ GDP?
A. Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32.
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%). Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B. The 1960s and 1970s
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%.
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C. The 1980s
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s. The difference was government spending for social programs was slashed, and military spending increased dramatically. During this decade, Debt/GDP rose to 42.2%.
D. The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%. Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II. US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security. Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year. Left unabated it will be half of our GDP in 10 years.
III. The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion. Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion. Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase. While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education.
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending?
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life. Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.
The biggest contraction of GDP since the Great Depression just took place, and caused a worldwide recession. No financial reform legislation on the horizon.
This is the story that may be bigger than either of those.
I. National Debt in Perspective
You'd have to be a recluse not to have heard the Tea Party movement raving about government spending. Do they have a point?
According to the latest Congressional Budget Office report, the US will spend $1.35 trillion more than its revenues this year, slightly less than the $1.4 trillion deficit in 2009. Our accumulated deficits (plus interest), or our National Debt is $12.38 trillion.
US debt is currently 86.7% of our Gross Domestic Production, and is projected to be 94.27% by the end of this year. How does that compare to our historic levels of Debt/ GDP?
A. Post-War Years
Since 1792, our average level ratio of Debt/GDP was 28.32.
Our lowest levels were from 1835 - 1842 (less than 1%), and our highest were 1945 - 1947 (averaging 114.34%), and 1948 - 1950 (averaging just under 92%). Note that the highest years were post World War II, when fears that military spending decreases would cause another Depression subsided, as growth in housing, cold war military spending and industrial production in automobiles, aviation and electronics increased throughout the 1950s.
B. The 1960s and 1970s
In the 1960s, the Kennedy Administration increased government spending and cut taxes, but the level of Debt/GDP dropped from 67.9% in the 1950s to 45.3%.
In the 1970s, a combination of increased inflation and a stagnant economy (coined "stagflation") resulted in high unemployment, and Debt/GDP dropped to 33.7% during that decade.
C. The 1980s
Beginning the decade with a brutal recession, the Reagan Administration responded with tax cuts and spending increases, much like the 1960s. The difference was government spending for social programs was slashed, and military spending increased dramatically. During this decade, Debt/GDP rose to 42.2%.
D. The 1990s and beyond
Economic growth brought deficits down to zero in the 1990s, but a growing debt primarily due Social Security and other social programs increased Debt/GDP to 63.7%. Continued growth in social programs (including the Medicare Drug Program), the Afghanistan and Iraq wars, and the housing bubble (with its ensuing world-wide financial crisis) increased the Debt/ GDP ratio to 64.6% during the decade ended 2009.
II. US Spending by Category
National Defense 19.9%
Human Resources (Including education, training, employment, social and veteran's services) 65.2%
Physical Resources (Including energy, environment, commerce, housing, transportation and community/regional development) 8%
Net interest on National Debt 3.8%
Other Functions (Including international, science, space and technology, agriculture, justice and general government) 5.6%
Undistributed Offsetting Receipts -2.3%
Clearly, the vast majority of US spending are in Human Services (65.2%), and almost half of that spending is Medicare and Social Security. Social Security spending alone is about equal to National Defense.
Spending on Health Care, as mentioned earlier, is 17% of GDP, and is growing at 12% per year. Left unabated it will be half of our GDP in 10 years.
III. The Big Untold Story
China is no longer the largest foreign holder of US debt, having recently reduced their holdings by $34.2 billion. Japan, who now holds more of our debt than any foreign holder, also reduced their holdings by $11.5 billion. Overall, foreign holders of our debt dropped by $53 billion, the largest drop in history.
With our debt increasing, and foreign lenders less willing to buy it, the Treasury Department will now have to attract investors with higher rates of interest.
The 3.8% of our budget we use to pay interest on our debt will increase. While $136 billion may seem a paltry amount in today's vernacular, we derive absolutely no benefit from it, and it is now equal to the amount we spend on education.
With foreign governments finding our debt less attractive, the amount we spend on interest will surely increase to attract other borrowers.
We haven't had the will to fix health care costs that will be 1/2 of our total output in a short 10 years if we do nothing.
We haven't the will to enact financial reforms after the biggest recession since the Great Depression.
Will we find the will to make the sacrifices necessary to cut spending?
Warren Buffett suggested that he will pay higher taxes and forego Social Security payments, regardless of the fact that he's paid into the system all his life. Admittedly, he's a lot weathier than we are.
Nevertheless, maybe he's on to something.
Thursday, December 31, 2009
Four Extraordinary Financial Predictions for the Coming Decade
As we leave the year of the "Great Recession" behind, knowing four likely financial outcomes will show us how to position ourselves for financial prosperity in the coming decade.
FOUR FINANCIAL PREDICTIONS
1) Global growth
Emerging economies were economically superior in the last decade. Without the effect of the tech and housing bubbles in their past, their demand is not hampered by enormous public (and private) debt. The better run of these economies will prosper in the coming decade, and provide markets for economies weakened by the lingering effects of the recent recession.
2) Inflation
As we emerge from the Great Recession, the reality of the damage is becoming more clear. Without government support, we'd be in a Depression. While the steps taken by G-20 nations were inarguably necessary, it effectively covered old problems with borrowed dollars, while keeping interest rates artifically low in order to give life to a near-death economy.
As more countries take on huge amounts of debt, the numbers of lenders who have the money and motivation to lend decrease. It's a simple formula that we all know: less demand for a commodity causes the price of that commodity to fall. If nobody is buying the farmer's apples, the farmer lowers her prices.
In the case of our debt (in the form of bonds), when bond prices fall, yields go up. Here's an example
Maturity Date - One Year. Price of bond - $1000. Interest paid by borrower - 4% Yield to lender - 4%
If the price of that $1000 bond falls to $980,
Maturity Date - One Year. Price of bond - $980. Interest paid by borrower - 4% Yield to lender - 6.1%
Higher interest rates mean higher inflation. The Fed can't keep rates artificially low forever.
3) The mortgage market
We have just seen the effect of lending to less-than-qualified-borrowers in the recent mortgage meltdown. You may be able to cut mortgages into little pieces and sell them to Iceland, but in the end, the mortgages will still go bad if the borrower can't pay it back. Since the crisis, financial reform has stalled. Mega-banks are repaying taxpayers for the money we spent keeping them alive, and, while lending standards have tightened, the genie has been let out of the bottle.
Investment bankers now operate under commercial bank charters. Structure finance has diminished the barrier to entry to the mortgage market. This demand, together with stricter lending practices, will provide additional upward pressure on interest rates.
4) Wealth transfer
Over the last decade, emerging nations have produced good for the insatiable US consumer, who bought with abandon. Now debt laden, US consumer growth is diminishing. Emerging nations, however, have newfound wealth. Those nations now lend money to our government, and have a huge and growing middle class.
China is the most obvious example, but there are others. These nations, assuming that they avoid the pitfalls of asset bubbles, will provide the majority of global growth in the early part of this decade with their newly acquired wealth.
A SHIFT IN THE PORTFOLIO PARADIGM
Before the effects of globalization, all but those who ascribed to "Modern Portfolio Theory" (those who invested a set percentage of their money in various asset classes) were confident in keeping their money largely in US equities and bonds.
With future diminished US growth prospects, however, this investment strategy is unlikely to be as successful in the next decade. History has shown that this strategy has not been effective in the past, as well. Investment veteran Art Cashin, Director of Floor Operations at UBS, recently reiterated his "theory of the 17.6-year cycle." He pointed out that the periods 1966-1982 and 1929-1947 were "lean cycles," and predicts that we are entering another such cycle at this time.
Consequently, the old benchmark of "Subtract your age from 100, put that percentage of your portfolio in high quality US stocks, and the remainder in bonds" may well be over.
What now? If you agree with the four assumptions discussed above, Pimco's Emerging Market fund manager (and former Harvard Endowment fund manager) Mohamed Il-Erian proposes the following portfolio:
STOCK 15% US, 15% Non-US Advanced Economies, 12% Emerging Markets, 7% Private Equity.
BONDS 5% US, 9% International, 5% US Treasury Inflation Protection Securities.
REAL ASSETS 6% Real Estate, 11% Commodities, 5% Infrastructure.
SPECIAL OPPORTUNITIES 8%
With an increasing investment in fast-growing emerging markets, with an emphasis on TIPS and real assets, this portfolio seeks growth with protection against inflation. If you agree that inflation will cause rates to rise, you'll want to delay your US bond purchases until rates are higher, and wait until gold prices fall before investing in that commodity. Depressed real estate prices, other than commercial property, show good value now.
Of course, as we've learned through the painful correction in the last decade, this portfolio does not include cashflow you will need in the next five to ten years. That is best kept in short-term Treasury issues or insured savings. Yes, rates are low now. But, they're likely to rise, as inflation picks up, and for this money, you want return OF capital more than return ON capital.
Have a safe, happy, healthy and prosperous new decade.
FOUR FINANCIAL PREDICTIONS
1) Global growth
Emerging economies were economically superior in the last decade. Without the effect of the tech and housing bubbles in their past, their demand is not hampered by enormous public (and private) debt. The better run of these economies will prosper in the coming decade, and provide markets for economies weakened by the lingering effects of the recent recession.
2) Inflation
As we emerge from the Great Recession, the reality of the damage is becoming more clear. Without government support, we'd be in a Depression. While the steps taken by G-20 nations were inarguably necessary, it effectively covered old problems with borrowed dollars, while keeping interest rates artifically low in order to give life to a near-death economy.
As more countries take on huge amounts of debt, the numbers of lenders who have the money and motivation to lend decrease. It's a simple formula that we all know: less demand for a commodity causes the price of that commodity to fall. If nobody is buying the farmer's apples, the farmer lowers her prices.
In the case of our debt (in the form of bonds), when bond prices fall, yields go up. Here's an example
Maturity Date - One Year. Price of bond - $1000. Interest paid by borrower - 4% Yield to lender - 4%
If the price of that $1000 bond falls to $980,
Maturity Date - One Year. Price of bond - $980. Interest paid by borrower - 4% Yield to lender - 6.1%
Higher interest rates mean higher inflation. The Fed can't keep rates artificially low forever.
3) The mortgage market
We have just seen the effect of lending to less-than-qualified-borrowers in the recent mortgage meltdown. You may be able to cut mortgages into little pieces and sell them to Iceland, but in the end, the mortgages will still go bad if the borrower can't pay it back. Since the crisis, financial reform has stalled. Mega-banks are repaying taxpayers for the money we spent keeping them alive, and, while lending standards have tightened, the genie has been let out of the bottle.
Investment bankers now operate under commercial bank charters. Structure finance has diminished the barrier to entry to the mortgage market. This demand, together with stricter lending practices, will provide additional upward pressure on interest rates.
4) Wealth transfer
Over the last decade, emerging nations have produced good for the insatiable US consumer, who bought with abandon. Now debt laden, US consumer growth is diminishing. Emerging nations, however, have newfound wealth. Those nations now lend money to our government, and have a huge and growing middle class.
China is the most obvious example, but there are others. These nations, assuming that they avoid the pitfalls of asset bubbles, will provide the majority of global growth in the early part of this decade with their newly acquired wealth.
A SHIFT IN THE PORTFOLIO PARADIGM
Before the effects of globalization, all but those who ascribed to "Modern Portfolio Theory" (those who invested a set percentage of their money in various asset classes) were confident in keeping their money largely in US equities and bonds.
With future diminished US growth prospects, however, this investment strategy is unlikely to be as successful in the next decade. History has shown that this strategy has not been effective in the past, as well. Investment veteran Art Cashin, Director of Floor Operations at UBS, recently reiterated his "theory of the 17.6-year cycle." He pointed out that the periods 1966-1982 and 1929-1947 were "lean cycles," and predicts that we are entering another such cycle at this time.
Consequently, the old benchmark of "Subtract your age from 100, put that percentage of your portfolio in high quality US stocks, and the remainder in bonds" may well be over.
What now? If you agree with the four assumptions discussed above, Pimco's Emerging Market fund manager (and former Harvard Endowment fund manager) Mohamed Il-Erian proposes the following portfolio:
STOCK 15% US, 15% Non-US Advanced Economies, 12% Emerging Markets, 7% Private Equity.
BONDS 5% US, 9% International, 5% US Treasury Inflation Protection Securities.
REAL ASSETS 6% Real Estate, 11% Commodities, 5% Infrastructure.
SPECIAL OPPORTUNITIES 8%
With an increasing investment in fast-growing emerging markets, with an emphasis on TIPS and real assets, this portfolio seeks growth with protection against inflation. If you agree that inflation will cause rates to rise, you'll want to delay your US bond purchases until rates are higher, and wait until gold prices fall before investing in that commodity. Depressed real estate prices, other than commercial property, show good value now.
Of course, as we've learned through the painful correction in the last decade, this portfolio does not include cashflow you will need in the next five to ten years. That is best kept in short-term Treasury issues or insured savings. Yes, rates are low now. But, they're likely to rise, as inflation picks up, and for this money, you want return OF capital more than return ON capital.
Have a safe, happy, healthy and prosperous new decade.
Friday, December 4, 2009
Can the Nation Afford It? - Part II
There are two sides to everything. Our previous discussion, that compared the US debtor status with other countries, showed that our GDP is nearly a quarter of the world's, and showed our status in numbers with a few less zeroes with the assumption that trillions are not numbers we throw around all that often.
Our example showed a woman earning $134,540 per year, who owes $125,000 mortgage and $1871 on her car. Doesn't sound so bad, does it?
Sadly, there is no perfect analogy. For example
Our example showed a woman earning $134,540 per year, who owes $125,000 mortgage and $1871 on her car. Doesn't sound so bad, does it?
Sadly, there is no perfect analogy. For example
- The woman in our example will own her home outright 30 years from now, after paying her $125,000 mortgage, and that home will likely appreciate in value over that time. US National Debt will do no such thing. It is paying for current programs. Thirty years from now, many of us will be dead, and that debt will continue to be paid by our children. Therefore, when considering a policy that increases our debt, the first consideration should be whether it is important enough that we encumber our children with its cost. For example, health care costs are 16% of the total budget, and that cost is rising at 12% per year. At that rate, in 10 years, health care costs will be 50% of the US budget. This is an unacceptable situation that must be addressed in a way that cuts cost acceleration significantly, or it will bankrupt the next generation.
- Lowering the level of national debt is a good thing, but it is the goal of no nation to completely pay off the national debt, as was the goal of the woman in our example to pay off her mortgage. According to Asia Times, even thrify China has $407.5 billion (3.26 trillion yuan) national debt as of 2005, approximately 18% of its GDP. Therefore, to quote a figure that each US citizen owes just under $40,000 per citizen is incorrect. Cutting the debt by 25% would be a more reasonable goal, which would require an average of $10,000 in tax increase per citizen - in addition to balancing the budget. Clearly, expentidures must be cut and taxes, increased.
- The primary issue is not the deficit per se; rather it is the direction and trajectory of the deficit. Right now, it's going up - fast. That's very bad. Piling on debt when revenue is flat is a terrible idea. However, we are just coming out of a recession. When the unemployment situation improves, revenues will increase. No increase of revenue, however, will address the current rise in the health care portion of the budget. That must be addressed through cost containment.
Wednesday, December 2, 2009
Can the Nation Afford It?
An enormous amount of discussion about health care, additional troop deployments, extension of unemployment benefits, etc., begins with opponents saying, "We can't afford it." Let's take a look at our debt, how it compares with other countries, and weigh the pros and cons of policy decisions based on an educated look at our financial circumstances.
Where would you rank the US among all debtor nations in the world?
1. Ireland's debt is 1267% of its GDP, or $2.386 trillion as of the second quarter, 2009. It produces the 35th largest GDP @ $267.579 billion.
2. Switzerland's debt is 422.7% of its GDP, or $1.338 trillion as of the second quarter, 2009. It produces the 21st largest GDP @ $500.260 billion.
3. The UK's debt is 408.3% of its GDP, or $9.087 trillion as of the second quarter, 2009. It produces the 6th largest GDP @ $2.680 trillion.
4. The Netherlands' debt is 365% of its GDP, or $2.452 trillion as of the second quarter, 2009. It produces the 16th largest GDP @ $876.970 billion.
5. Belgium's debt is 320.2% of its GDP, or $1.246 trillion as of the first quarter, 2009. It produces the 20th largest GDP @ $506.183 billion.
6. Denmark's debt is 298.3% of GDP, or $607.38 billion as of the second quarter, 2009. It produces the 28th largest GDP @ $340.029 billion.
7. Austria's debt is 252.6% of its GDP, or $832.42 billion as of the second quarter, 2009. It produces the 14th largest GDP @ $1.013 billion.
8. France's debt is 236% of its GDP, or $5.021 trillion as of the second quarter, 2009. It produces the 5th largest GDP @ $2.867 trillion.
9. Portugal's debt is 214.4% of its GDP, or $507 billion as of the second quarter, 2009. It produces the 37th largest GDP @ $244.640 billion.
10. Hong Kong's debt is 205.8% of its GDP, or $631.13 billion as of the second quarter, 2009. While not an independent nation, it produces the 41st largest GDP @ $215.354 billion.
11. Norway's debt is 199% of its GDP, or $548.1 billion as of the second quarter, 2009. It produces the 24th largest GDP @ $451.830 billion.
12. Sweden's debt is 194.3% of its GDP, or $669.1 billion as of the second quarter, 2009. It produces the 22nd largest GDP @ $478.961 billion.
13. Finland's debt is 188.5% of its GDP, or $364.85 billion as of the second quarter, 2009. It produces the 34th largest GDP, @ $271.867 billion.
14. Germany's debt is 178.5% of its GDP, or $5.208 trillion as of the second quarter, 2009. It produces the
4th largest GDP @ $3.673 trillion.
15. Spain's debt is 171.5% of its GDP, or $2.409 trillion as of the second quarter, 2009. It produces the 9th largest GDP @ $1.602 trillion.
16. Greece's debt is 161.1% of its GDP, or $552.8 billion as of the second quarter, 2009. It produces the 27th largest GDP @ $357.548 billion.
17. Italy's debt is 126.7% of its GDP, or $2.310 trillion as of the first quarter, 2009. It produces the 7th largest GDP @ $2.314 billion.
18. Australia's debt is 111.3% of its GDP, or $891.26 billion as of the second quarter, 2009. It produces the 14th largest GDP, @ $1.013 trillion.
19. Hungary's debt is 105.7% of its GDP, or $207.92 billion as of the first quarter, 2009. It produces the 52nd largest GDP @ $156 billion.
20. USA's debt is 94.3% of GDP, or $13.454 trillion billion as of the first quarter, 2009. It produces the largest GDP @ $14.441 trillion. The next highest is Japan, at $9.5 trillion less, followed by China, at more than $10 trillion less. A discussion of the level of US national debt in historic context can be found here.
(GDP ranking source: IMF, Annual GDP source: CNBC)
Surprised?
Let's put this into context. Let's move a couple of zeroes and turn the US into a person. This person earns $134,540 per year. She owes $125 thousand on a mortgage and $1871 on her car. Would you consider this person in an unreasonably high debt level?
Next year, she will take out an equity loan on her home for $14,573. This will increase her level of debt to $141,444 (assuming she pays only the interest on this debt during the prior year). Now she owes 105% of what she makes. Do you consider this person in an unreasonably high debt level?
At this point, compared with other nations we are 20th as a debtor. Historically, in 1944, our debt to GDP was 91.45%, in 1945, 115.95% in 1946, 121.2% in 1946, 105.77% in 1947, 93.72% in 1948, and 94.56% in 1949.
In 1949, the S&P 500 Index grew 18.79%. In 1950, it grew 31.71%. In 1951, it grew 24.02%. In 1952, it grew 18.37%. In 1953, it fell by .99%, and rose 52.62% in 1954. Not only have we been at these debt levels before, but we grew handsomely after that period.
I'm not saying that I think debt is a good thing. I don't. But, I do think that the "we can't afford it" manta must be put into perspective. If the policy issue is critically important, we can afford it.
The question should be whether the policy issue is critically important.
Where would you rank the US among all debtor nations in the world?
1. Ireland's debt is 1267% of its GDP, or $2.386 trillion as of the second quarter, 2009. It produces the 35th largest GDP @ $267.579 billion.
2. Switzerland's debt is 422.7% of its GDP, or $1.338 trillion as of the second quarter, 2009. It produces the 21st largest GDP @ $500.260 billion.
3. The UK's debt is 408.3% of its GDP, or $9.087 trillion as of the second quarter, 2009. It produces the 6th largest GDP @ $2.680 trillion.
4. The Netherlands' debt is 365% of its GDP, or $2.452 trillion as of the second quarter, 2009. It produces the 16th largest GDP @ $876.970 billion.
5. Belgium's debt is 320.2% of its GDP, or $1.246 trillion as of the first quarter, 2009. It produces the 20th largest GDP @ $506.183 billion.
6. Denmark's debt is 298.3% of GDP, or $607.38 billion as of the second quarter, 2009. It produces the 28th largest GDP @ $340.029 billion.
7. Austria's debt is 252.6% of its GDP, or $832.42 billion as of the second quarter, 2009. It produces the 14th largest GDP @ $1.013 billion.
8. France's debt is 236% of its GDP, or $5.021 trillion as of the second quarter, 2009. It produces the 5th largest GDP @ $2.867 trillion.
9. Portugal's debt is 214.4% of its GDP, or $507 billion as of the second quarter, 2009. It produces the 37th largest GDP @ $244.640 billion.
10. Hong Kong's debt is 205.8% of its GDP, or $631.13 billion as of the second quarter, 2009. While not an independent nation, it produces the 41st largest GDP @ $215.354 billion.
11. Norway's debt is 199% of its GDP, or $548.1 billion as of the second quarter, 2009. It produces the 24th largest GDP @ $451.830 billion.
12. Sweden's debt is 194.3% of its GDP, or $669.1 billion as of the second quarter, 2009. It produces the 22nd largest GDP @ $478.961 billion.
13. Finland's debt is 188.5% of its GDP, or $364.85 billion as of the second quarter, 2009. It produces the 34th largest GDP, @ $271.867 billion.
14. Germany's debt is 178.5% of its GDP, or $5.208 trillion as of the second quarter, 2009. It produces the
4th largest GDP @ $3.673 trillion.
15. Spain's debt is 171.5% of its GDP, or $2.409 trillion as of the second quarter, 2009. It produces the 9th largest GDP @ $1.602 trillion.
16. Greece's debt is 161.1% of its GDP, or $552.8 billion as of the second quarter, 2009. It produces the 27th largest GDP @ $357.548 billion.
17. Italy's debt is 126.7% of its GDP, or $2.310 trillion as of the first quarter, 2009. It produces the 7th largest GDP @ $2.314 billion.
18. Australia's debt is 111.3% of its GDP, or $891.26 billion as of the second quarter, 2009. It produces the 14th largest GDP, @ $1.013 trillion.
19. Hungary's debt is 105.7% of its GDP, or $207.92 billion as of the first quarter, 2009. It produces the 52nd largest GDP @ $156 billion.
20. USA's debt is 94.3% of GDP, or $13.454 trillion billion as of the first quarter, 2009. It produces the largest GDP @ $14.441 trillion. The next highest is Japan, at $9.5 trillion less, followed by China, at more than $10 trillion less. A discussion of the level of US national debt in historic context can be found here.
(GDP ranking source: IMF, Annual GDP source: CNBC)
Surprised?
Let's put this into context. Let's move a couple of zeroes and turn the US into a person. This person earns $134,540 per year. She owes $125 thousand on a mortgage and $1871 on her car. Would you consider this person in an unreasonably high debt level?
Next year, she will take out an equity loan on her home for $14,573. This will increase her level of debt to $141,444 (assuming she pays only the interest on this debt during the prior year). Now she owes 105% of what she makes. Do you consider this person in an unreasonably high debt level?
At this point, compared with other nations we are 20th as a debtor. Historically, in 1944, our debt to GDP was 91.45%, in 1945, 115.95% in 1946, 121.2% in 1946, 105.77% in 1947, 93.72% in 1948, and 94.56% in 1949.
In 1949, the S&P 500 Index grew 18.79%. In 1950, it grew 31.71%. In 1951, it grew 24.02%. In 1952, it grew 18.37%. In 1953, it fell by .99%, and rose 52.62% in 1954. Not only have we been at these debt levels before, but we grew handsomely after that period.
I'm not saying that I think debt is a good thing. I don't. But, I do think that the "we can't afford it" manta must be put into perspective. If the policy issue is critically important, we can afford it.
The question should be whether the policy issue is critically important.
Tuesday, October 27, 2009
A Woman's World Economic View
I. The United States
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.
It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.
We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.
Then we really saw the force of this nasty recession.
Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.
II. Our Place in the World Economy
From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.
In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.
We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.
Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.
III. Popular Misconception
There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.
Smart sellers don't bankrupt their main customers, and China is not stupid.
Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.
Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.
Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.
Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.
IV. Future Course
Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.
Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.
We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.
V. What We Do
What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.
Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.
Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.
What we do matters.
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.
It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.
We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.
Then we really saw the force of this nasty recession.
Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.
II. Our Place in the World Economy
From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.
In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.
We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.
Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.
III. Popular Misconception
There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.
Smart sellers don't bankrupt their main customers, and China is not stupid.
Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.
Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.
Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.
Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.
IV. Future Course
Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.
Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.
We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.
V. What We Do
What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.
Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.
Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.
What we do matters.
Wednesday, August 19, 2009
Late Summer Economy
Summer is generally a time when capital markets languish, brokers vacation in the Hamptons, and there is little economic news. That is not the case in the Summer of 2009.
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?
- Financial Regulation - Plug up the holes that caused excesses without unduly burdening the financial system
- Long Term Employment Growth Policy - Some jobs, including much manufacturing, are gone forever. Reeducating the work force for long term employment is vital
- Deficit Reduction and National Debt Repayment - Once we've stabilized the economy and gotten back to work (in about a year), we need to raise taxes. Yes, we all need to pay more taxes to reduce the current deficit and repay the national debt. It is as big a security issue as reliance on foreign oil.
There you have it. It's not a pretty story, but at least we're talking about the real issues.
As always, your comments are most welcome.
Monday, August 3, 2009
Stagflation and Its Potential to Derail Economic Recovery
Unemployment
We've previously discussed the fact that the current unemployment rate, while high, is not at the level it was in some previous recessions. We've also discussed that unemployment tends to last longer than recession, and is therefore called a "lagging" indicator.
But that's not the whole story. Further research shows that unemployment may actually be behaving differently than it has in past economic recoveries.
In the statistical measurement called "standard deviation," the US is deviating from the standard behavior of unemployment as measured by Arthur Okun, a prominent economist in the 1960s. The relationship he discovered was that between the degree to which the economy contracted and the concurrent rise in unemployment. This relationship, called Okun's Law, had been reasonably reliable - until now. At the current rate of decline in our economy, his calculations show that we should have a current unemployment rate of 8% - not 9.5%. We have lost almost 5% of all jobs - far surpassing the 3% we lost in the 1980s recession when unemployment last reached over 10%.
We previously discussed the fact that, during a recession, employers tend to keep employees at a level that will accommodate the return of growth after the recession ends. It is that "buffer" that results in a delay in hiring, as these employees increase their productivity during the growth phase, eliminating the necessity to add workers until the economic growth trajectory is well under way.
In this recession, however, further examination of employment patterns show that this "buffer" has not been kept. Does this mean that employers, jarred by inability to obtain credit by the frozen financial system, panicked and cut employment more than usual? Perhaps.
But, that does not explain the additional fact that, since 2001, overall hiring has been contracting. During the 1990s, employment expansion was at a rate of 8 workers for every 100 on staff. That expansion dropped to 7 workers per 100 during the 2001 recession. Hiring, however, stayed at that level after the recession was over, and has now fallen to 6/100.
Perhaps a part of this failure to hire can be attributed to
We've previously discussed the fact that the current unemployment rate, while high, is not at the level it was in some previous recessions. We've also discussed that unemployment tends to last longer than recession, and is therefore called a "lagging" indicator.
But that's not the whole story. Further research shows that unemployment may actually be behaving differently than it has in past economic recoveries.
In the statistical measurement called "standard deviation," the US is deviating from the standard behavior of unemployment as measured by Arthur Okun, a prominent economist in the 1960s. The relationship he discovered was that between the degree to which the economy contracted and the concurrent rise in unemployment. This relationship, called Okun's Law, had been reasonably reliable - until now. At the current rate of decline in our economy, his calculations show that we should have a current unemployment rate of 8% - not 9.5%. We have lost almost 5% of all jobs - far surpassing the 3% we lost in the 1980s recession when unemployment last reached over 10%.
We previously discussed the fact that, during a recession, employers tend to keep employees at a level that will accommodate the return of growth after the recession ends. It is that "buffer" that results in a delay in hiring, as these employees increase their productivity during the growth phase, eliminating the necessity to add workers until the economic growth trajectory is well under way.
In this recession, however, further examination of employment patterns show that this "buffer" has not been kept. Does this mean that employers, jarred by inability to obtain credit by the frozen financial system, panicked and cut employment more than usual? Perhaps.
But, that does not explain the additional fact that, since 2001, overall hiring has been contracting. During the 1990s, employment expansion was at a rate of 8 workers for every 100 on staff. That expansion dropped to 7 workers per 100 during the 2001 recession. Hiring, however, stayed at that level after the recession was over, and has now fallen to 6/100.
Perhaps a part of this failure to hire can be attributed to
- A permanent loss of manufacturing and other jobs "outsourced" to countries who can produce goods at a lower cost than the US
- Less innovation = fewer new businesses. During war time, technology tends to be focused on the war effort as opposed to innovations in the private sector.
- As aging baby boomers leaving the work force, the total number of workers lessens and unemployment rates appear larger. As an example, with a total work force of 100, if 5 people are unemployed, the unemployment rate is 5%. With a total work force of 90, if 5 people are unemployed, the unemployment rate is 5.5%
Whatever the explanation, there is a big difference between a sustained decrease in hiring, as there has been since the 2001 recession and thereafter, and job losses due to a recession. Jobs lost in economic downturns have historically returned, but only when confidence that economic recovery was well in force.
Stimulus
Some argue that the unemployment problem is partially addressed by the stimulus program. This is only partially true, because government programs aimed at repairing the infrastructure, e.g., roads, bridges, etc., are temporary in nature.
Confidence
Jobs lost in economic downturns have historically returned only when economic confidence returned to the private sector. Certainly, no employer wants to add workers unless she feels that a sustained recovery is under way.
Sustainable Jobs
The Obama administration has opined that new job growth be in technological advances in green energy, which will address the national security issues of oil imports, the international need to reduce greenhouse gases, and provide a cost effective alternative to depleting international sources of fossil fuels. With the current lack of emphasis in math and science in the educational system, this goal will be difficult to achieve in the short run. Regardless of the source of so-called sustainable jobs, however, it is crucial that job growth be achieved - and soon.
Falling Wages
One need only look at the economic problems in the State of California and publishers like the Boston Globe to see that we are experiencing a period of falling wages. Wages, expected to be flat during periods of recession, are in danger of falling as businesses and municipalities cut expenditures to the bone.
Additional Stimulus
Should unemployment rates continue to fall precipitously, and wages fall as businesses try to survive, the government may be tempted to provide additional stimulus. That, in my opinion, would result in the disastrous recipe for stagflation. Stagflation = Stagnant (or falling) Wages + Inflation.
But, inflation is very low, you may argue. True, but the national debt, approaching $10 trillion dollars, must be repaid. And, as debt is piled on, higher and higher rates must be paid to borrowers who lend us money. Higher rates mean higher cost of borrowing in the public and private sector, which result in higher costs. Higher costs plus stagnant wages = Stagflation.
What Now
The goal of sustainable job growth is an absolutely critical part of the answer. That means that we will need
- An immediate retooling of our workforce in skills necessary for sustainable jobs
- Education emphasis on math and science
- Accommodative policies to encourage investment in sustainable business
- Immediate policies enacted to reduce deficits
- Bi-partisan support for such policies to encourage confidence.
The last issue is critical. Without confidence, business will stay stagnant. It's a tall order, and there's an immense economic outcome at stake. Failure to achieve sustainable job growth will result in a more serious long term economic problem than has faced our country to date. It is up to every one of us to voice our opinion to our representatives and demand that action be taken immediately, or accept a generation of economic decline.
Sunday, July 19, 2009
Health Care Legislation
In the current debate about health care, facts are few and opinions are many. Here are some facts that may help you form your own opinion.
What We're Spending Now
The US Department of Health and Human Services' Center for Disease Control, using data from the Organisation for Economic Co-operation and Development , notes spending on health goods and services plus health-care infrastructure as a percentage of Gross Domestic Product as follows:
What We're Spending Now
The US Department of Health and Human Services' Center for Disease Control, using data from the Organisation for Economic Co-operation and Development , notes spending on health goods and services plus health-care infrastructure as a percentage of Gross Domestic Product as follows:
- United States - 15.3%
- Switzerland - 11.3%
- France - 11%
- Germany - 10.6%
- Belgium - 10.3%
- Portugal - 10.2%
- Austria - 10.1%
- Canada - 10%
- Netherlands & Denmark - 9.5%
- Sweden - 9.2%
Source: http://www.cdc.gov/mmWR/preview/mmwrhtml/mm5813a5.htm
US health care costs have more than tripled in inflation-adjusted terms over the last 20 years to their current level of 15.3%.
What We'll Be Spending If We Do Nothing
Further, if current policies remain unchanged, that percentage will increase to 25% of GDP in 2025, and 49% in 2082.
http://www.cbo.gov/ftpdocs/89xx/doc8948/01-31-HealthTestimony.pdf
Long Live the Rich, and the Poor Die Young
Yet, according to the NY Times, government research shows “large and growing” differences between the lifespan of Americans, based on their wealth. Admitting researchers in disagreement for reasons for this growing disparity, they do agree that a part of the explanation lies in whether an individual has health insurance.
Source: http://www.nytimes.com/2008/03/23/us/23health.html?_r=1
Expand Access and Curb Costs - One Out of Two
The Administration 's main objectives stated earlier this year were:
- Expand access to health insurance, and
- Curb runaway costs for the economy has a whole.
Current House legislation being considered, however, "significantly expands the federal responsibility for health-care costs," says Douglas Elmendorf, director of the Congressional Budget Office. The Senate Finance Committe has not yet released their verion of the bill. As both versions of health care legislation advance, expanding coverage has been embraced while few compromises have been made with pharmaceutical companies where savings were to have been made.
Allegations that the CBO has not "credited" such proposals as "preventative care measures" have been asserted. Those assertions are correct. It is apparent that preventative care will result in lower long term health costs. It is inappropriate, however, to assign a dollar amount to that cost savings, as that amount would be impossible to quantify.
One more quantifiable compromise would be to reduce the federal tax subsidy that encourages employers to offer large health-insurance policies, but that proposal has been opposed by labor unions (that have these tax-advantaged plans).
Where We Are Now
Current legislation has not yet achieved the goal of cutting costs in a way that will prevent unsustainable increases in health spending. Special interests on one side - particularly labor unions - are at odds with
- AMA (that wants increases in Medicare payments to doctors)
- Insurance companies (that want to prevent a government-run competitor in the marketplace)
Whatever your opinion, it is time to contact your Congressional representatives. Achieving both access and cost containment is critically important in solving this problem. The link below is provided for your convenience in doing so.
Wednesday, July 15, 2009
A Look at the Deficit and the National Debt
If you ask the average person the difference between the deficit and the national debt, you're likely to get a blank stare. While you are much smarter than the average Josephine, we'll go over that anyway, just in case you were asleep during that session of your Econ class.
The Deficit
The deficit is the amount of money we're spending THIS YEAR that exceeds the amount we brought in. The national debt is the sum total of all the deficits we've had. From 1749, we've had a total of about $6.3 trillion dollars in deficit spending. When you add interest paid on borrowing to pay that debt, it climbs to about $9.5 trillion. Since 1900, we've had 31 years where our income exceeded our expenses The other 79 years have had deficit spending. This year, the projected deficit is $407 billion. Last year, it was $410 billion.
For those who are politicizing current spending, here's a little perspective
The Deficit
The deficit is the amount of money we're spending THIS YEAR that exceeds the amount we brought in. The national debt is the sum total of all the deficits we've had. From 1749, we've had a total of about $6.3 trillion dollars in deficit spending. When you add interest paid on borrowing to pay that debt, it climbs to about $9.5 trillion. Since 1900, we've had 31 years where our income exceeded our expenses The other 79 years have had deficit spending. This year, the projected deficit is $407 billion. Last year, it was $410 billion.
For those who are politicizing current spending, here's a little perspective
- 1999 - $125 billion surplus (Clinton)
- 2000 - $236 billion surplus (Clinton)
- 2001 - $128 billion surplus (Bush)
- 2002 - $157 billion deficit (Bush)
- 2003 - $377 billion deficit (Bush)
- 2004 - $412 billion deficit (Bush)
- 2005 - $318 billion deficit (Bush)
- 2006 - $248 billion deficit (Bush)
- 2007 - $162 billion deficit (Bush)
- 2008 - $410 billion deficit (Bush)
- 2009 - $407 billion deficit - projected (Obama)
While it is admittedly very large, the deficit this year is currently projected to be less than the deficit last year.
So, now we're hearing many pundits, talking heads and others screaming about the size of the deficit. Some of those people are saying that we simply cannot afford to spend money on programs such as the stimulus, health care reform, etc. because of the size of the deficit. Without commenting one way or the other, one wonders where those were voices last year, when the deficit was $3 billion larger.
The National DebtOur national debt is fast approaching $10 trillion dollars. For those not familiar with very big numbers, that's ten thousand billion. It looks like this - $10,000,000,000,000. No doubt about it. That's one big number.
Again, as a matter of perspective, here is the cumulative amount of the national debt for the last decade.
- 1999 - $5.605 billion (Clinton)
- 2000 - $5.628 billion (Clinton)
- 2001 - $5.769 billion (Bush)
- 2002 - $6.198 billion (Bush)
- 2003 - $6.760 billion (Bush)
- 2004 - $7.354 billion (Bush)
- 2005 - $7.905 billion (Bush)
- 2006 - $8.451 billion (Bush)
- 2007 - $8.950 billion (Bush)
- 2008 - $9.654 billion (Bush)
- 2009 - 10.413 billion (projected) (Obama)
Source: http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf
The national debt is projected to rise by 7.8% this year. That is the same percentage it rose between 2007 and 2008. Again, without commenting one way or the other, where was the outrage last year? Why is the 7.8% rise this year so much worse than the 7.8% rise last year?
How Much Do I Owe?
Those who express outrage regarding the national debt sometimes express the debt in terms of the amount that is owed by every man, woman and child in the US. Currently, that amount is nearly $34 thousand. Again, to gain some perspective, let's look at a couple of facts.
In 1960, the national debt was $290 billion and the population was 179.3 million. Every American owed about $1620 - $5432 in today's dollars.
In 1970, the national debt was $380.9 billion and the population was 203.3 million. Every American owed $1873 - $4908 in today's dollars (less than the prior decade).
In 1980, the national debt was $909 billion and the population was 248.7 million. Every American owed $3665 - $7479 in today's dollars.
In 1990, the national debt was $3.206 billion and the population was 248.7 million. Every American owed $12,879 - $20,589 in today's dollars. Big jump.
In 2000, the national debt was $5.629 billion and the population was 281.4 million. Every American owed $20,002 - $24,980 in today's dollars.
In 2009, the national debt is projected to be $10.413 billion and the population is 306.9 million. Every American owes about $34,000. Big jump again, but not as big as it was from the '80s to the '90s.
Population information was obtained from http://www.census.gov/popest/archives/1990s/popclockest.txt
Debt as a Percentage of Gross Domestic Product
Realistically, the national debt will never actually be paid to zero. We've had debt since 1900. The way to evaluate debt is as a percentage of GDP.
- 1970 - 8.9%
- 1980 - 15.6%
- 1990 - 40%
- 2000 - 50.7%
- 2009 - 73%
That is what is making people nervous. Let's put this in terms we can all relate to. Say that you have a mortgage that is $3500 per month, and your after-tax income is $4795 per month. After paying your mortgage, you will have about $1300 for everything you need. You're spending 73% of your income on your debt. Scary.
We can all agree that we're in a lot of debt. But let's not pretend that it happened this year. This problem has been mounting for a long time, exacerbated in the 1980's and in the current decade.
As always, I welcome your comments and suggestions.
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