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 deficit. Show all posts
Showing posts with label deficit. Show all posts
Thursday, June 10, 2010
Tuesday, March 23, 2010
Is Janet Yellen the Best Candidate for Vice Chair of the Fed?
San Francisco Federal Reserve Bank President Janet Yellin is Obama's nominee for Vice Chair of the Federal Reserve Bank. Why this policy dove may be a perfect short term answer, and a long term disaster.
Mission
The primary role of the Fed is the pursuit of maximum employment and price stability. Sounds simple.
It's anything but.
I. Maximum Employment
To pursue the goal of full employment, the Fed must make business conditions favorable to hiring. That means that businesses must be able to borrow easily, expand and hire employees to facilitate such growth. As you know, banks must keep a certain amount of their deposits with their local branch of the Federal Reserve Bank in order to have sufficient liquidity to prevent panics that contributed to the Great Depression. When short term interest rates are low, banks can more freely lend to businesses because they don't have to keep as close an eye on their cash reserves. Money's cheap.
When rates rise, banks keep a tighter rein on lending by strengthening borrowing standards. It's harder to get a loan, business expansion slows and jobs are harder to get.
Why not have a continuing policy of low interest rates?
II. Price Stability
Price stability is another way of saying low inflation. Inflation is the amount prices go up every year. Anyone who lived through the 1970s remembers that prices rose much faster than wages. Every year our same dollars bought less and less.
When inflation takes hold, it's hard to stop. People want more money to afford what they could afford last year. If they get raises, however, their businesses have to raise prices to cover higher payroll costs, so costs rise. A vicious circle ensues, where labor wants raises and businesses want higher prices. What stops the circle? A recession, when businesses lay off workers and can contain prices. The higher inflation, the more prolonged the recession.
The problem is, during the recession, the Fed is pressured to lower interest rates to stimulate the economy. But, r
Once inflation takes hold, it's very hard to stop.
A Dovish Policymaker
Janet Yellin is described as an inflation "dove." That means that her decisions have been "growth and employment" oriented and less focused on containment of inflation. You may think, that with unemployment rates hovering in the double-digits, this is just what we need. Certainly, that political opinion would be currently popular. But, would it be a good long term policy?
Deficits and Inflation
No reputable economist of whom I'm aware would not have advised deficit spending to stimulate the economy during the last recession. It was a necessary evil that prevented the country from likely sinking into a Depression. But historically, the relationship between deficit spending and inflation is problematic.
Generally, when government borrowing increases, the amount of funds that remains for businesses and individuals to borrow decreases, and the competition for these fewer dollars causes rates to increase.
So-called inflation "doves," who generally advise keeping rates low, can accommodate both government and business lending only by printing more money for the government to buy its own debt, causing the money supply to expand and debt to contract.
Expanding the money supply is inflationary. Instead of raising taxes to pay its debt, printing more money makes the dollar less valuable. The cost of everything goes up when your dollar is worth less.
The Federal Reserve Board of Governors
At its last meeting, only one Fed governor, that of St. Louis, voted against keeping interest rates low. The majority (11 members) voted to keep rates low because their perception that the risk of sinking back into recession was more significant than the threat of inflation. Dr. Bernanke, current Fed chairman, is considered one of the premier scholars of the Great Depression. One significant factor in its length is thought to be insufficient economic stimulus. It is a mistake about which Bernanke argues eloquently, and apparently the majority of the board agrees.
With a propensity of more dovish members, however, it is of some concern that one who has been one of the most consistent would be considered as the Vice Chair. Generally, upon the retirement or failure to reappoint the Chair, the Vice Chair is likely to assume this influential post.
At a time when deficit spending is so high, the national debt is ballooning and the nation only recently stepped back from the brink of Depression, is it wise to choose a member who is so dovish about inflation that she stated last February, "If it were possible to take interest rates into negative territory I would be voting for that."?
Perhaps a candidate with a more balanced approach to the Fed's dual mandate would be a more reasonable decision.
Mission
The primary role of the Fed is the pursuit of maximum employment and price stability. Sounds simple.
It's anything but.
I. Maximum Employment
To pursue the goal of full employment, the Fed must make business conditions favorable to hiring. That means that businesses must be able to borrow easily, expand and hire employees to facilitate such growth. As you know, banks must keep a certain amount of their deposits with their local branch of the Federal Reserve Bank in order to have sufficient liquidity to prevent panics that contributed to the Great Depression. When short term interest rates are low, banks can more freely lend to businesses because they don't have to keep as close an eye on their cash reserves. Money's cheap.
When rates rise, banks keep a tighter rein on lending by strengthening borrowing standards. It's harder to get a loan, business expansion slows and jobs are harder to get.
Why not have a continuing policy of low interest rates?
II. Price Stability
Price stability is another way of saying low inflation. Inflation is the amount prices go up every year. Anyone who lived through the 1970s remembers that prices rose much faster than wages. Every year our same dollars bought less and less.
When inflation takes hold, it's hard to stop. People want more money to afford what they could afford last year. If they get raises, however, their businesses have to raise prices to cover higher payroll costs, so costs rise. A vicious circle ensues, where labor wants raises and businesses want higher prices. What stops the circle? A recession, when businesses lay off workers and can contain prices. The higher inflation, the more prolonged the recession.
The problem is, during the recession, the Fed is pressured to lower interest rates to stimulate the economy. But, r
Once inflation takes hold, it's very hard to stop.
A Dovish Policymaker
Janet Yellin is described as an inflation "dove." That means that her decisions have been "growth and employment" oriented and less focused on containment of inflation. You may think, that with unemployment rates hovering in the double-digits, this is just what we need. Certainly, that political opinion would be currently popular. But, would it be a good long term policy?
Deficits and Inflation
No reputable economist of whom I'm aware would not have advised deficit spending to stimulate the economy during the last recession. It was a necessary evil that prevented the country from likely sinking into a Depression. But historically, the relationship between deficit spending and inflation is problematic.
Generally, when government borrowing increases, the amount of funds that remains for businesses and individuals to borrow decreases, and the competition for these fewer dollars causes rates to increase.
So-called inflation "doves," who generally advise keeping rates low, can accommodate both government and business lending only by printing more money for the government to buy its own debt, causing the money supply to expand and debt to contract.
Expanding the money supply is inflationary. Instead of raising taxes to pay its debt, printing more money makes the dollar less valuable. The cost of everything goes up when your dollar is worth less.
The Federal Reserve Board of Governors
At its last meeting, only one Fed governor, that of St. Louis, voted against keeping interest rates low. The majority (11 members) voted to keep rates low because their perception that the risk of sinking back into recession was more significant than the threat of inflation. Dr. Bernanke, current Fed chairman, is considered one of the premier scholars of the Great Depression. One significant factor in its length is thought to be insufficient economic stimulus. It is a mistake about which Bernanke argues eloquently, and apparently the majority of the board agrees.
With a propensity of more dovish members, however, it is of some concern that one who has been one of the most consistent would be considered as the Vice Chair. Generally, upon the retirement or failure to reappoint the Chair, the Vice Chair is likely to assume this influential post.
At a time when deficit spending is so high, the national debt is ballooning and the nation only recently stepped back from the brink of Depression, is it wise to choose a member who is so dovish about inflation that she stated last February, "If it were possible to take interest rates into negative territory I would be voting for that."?
Perhaps a candidate with a more balanced approach to the Fed's dual mandate would be a more reasonable decision.
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.
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.
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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