Monday, February 18, 2013

review of the debt and the debt talks two years ago

This is a repost of an old blog of mine, examining the structure of the deficit in 2011...
I'd like to add my take on the national debt and the current debt crisis, firstly because it is the most important political issue to me (and has been since I was a teenager), and secondly because I think there is a lot more focus on the fluff of the debate than the substance.  I've tagged each section separately, if you want to just browse the areas that interest you the most.  Hopefully this can help be a cheat sheet on the debt, so you can express your opinions with some knowledge on the issue.
National Debt:  The national debt currently sits near 14.2 trillion dollars.  That is 14200000000000 dollars, or roughly 40000 dollars for each man, woman, and child in the country.  This number has doubled in the past decade, and ignores future unfunded liabilities that could eventually reach as high as 70 trillion, roughly 5 times current gdp.  This graph shows the debt in two terms: raw debt, and debt as a percentage of GDP.  Note the current public debt is around 70% of GDP, which is the highest its been since we were paying down our debt on WWII.  The difference between the two debts is one was due to temporary spending to fund the war effort, and one is driven largely by long term liabilities, and will not be going down any time soon.  Public debt is held by a number of institutions, including the federal reserve, foreign nations, and 
National Deficit:  This is the amount of money we spend each year beyond the revenue which we take in.  The current federal deficit is roughly 1.2 trillion dollars every year, according to the CBO.  That means about 40 cents of every dollar the government spends is not backed by revenue coming in.  The last time we were deficit neutral was the beginning of the Bush administration, which was a result of bipartisan management of the budget during the end of the Clinton administration (cutting spending on military and welfare), as well as the economic expansion due to the internet in the late 90's.  In my view, unfunded spending amounts to a type of hidden tax, where we get less value out of the dollar we spend due to the future interest we have to pay on it.
To be fair in assessing the long term damage, we need to know where all this new debt has been coming from over the last decade, and moving forward.  There isn't one source of the problem.  We want to figure out where that 7 trillion dollars have gone, as well as where the future problems lie.
Wars in Iraq and Afghanistan:
Since 2001, the total expenditures for these wars has totaled about 1.2 trillion dollars, around 17% of the debt problem over the last decade.  Moving forward, it is expected these wars will contribute less and less to the debt as the wars wind down and troops are brought home.
Bush Tax Cuts:
With projections of as much as a 5 trillion dollar surplus at the start of the 2000's, Bush pressed tax cuts through congress, and again following the 9/11 attacks to stimulate the economy during the dot com recession.  The total cost of those cuts over that decade were about 1.6 trillion dollars, and may expand to 2.8 trillion over the next decade due to the Obama expansion of the cuts.  People paint these tax cuts as targeting the rich, but keep in mind 2/3 of these cuts went to people making less than 200k per year, or families less than 250k per year.  Obama's plan to extend these cuts for the middle class would increase the debt by 2.2 trillion dollars over the next decade.
New Entitlements (Prescription Drugs):
President Bush pressed a prescription drug plan through congress in 2006, without increasing taxes to pay for the new entitlement.  This adds approximately 550 billion dollars to the debt between 2006 and 2015, or about 400 billion to the current debt total.  This will add approximately 70 billion dollars per year to future deficits.
Tarp (Bailout of Financial Institutions):
The Fed, the Bush administration, and later the Obama administration, spent nearly 1.5 trillion dollars to buy failing mortgage backed securities, bail out financial institutions, and prop up auto makers.  It remains to be seen how much of this money comes back in the form of repaid loans and stock gains in government owned corporations. 
The Internet Bubble, 9/11 attacks, and The Great Recession:
Its much harder to gauge the impact of loss in revenue as a result of the recessions over the past decade.  This graph shows the direct revenue of the government over time. We can clearly see that revenue declined significantly during periods of recession. Government spending is pretty steadily increasing, not matching losses in revenue when GDP shrinks.
Economic Stimulus Plans (Bush and Obama's attempts to dull the hit on the economy):
The Bush administration pushed through 120 billion in tax cuts in the early days of the great recession.  The Obama administration passed approximately 750 billion through the Economic Recovery Act.  Neither was particularly effective, and combined added nearly a trillion dollars to the debt.
Like Europe, America is approaching a period where a greater percentage of the population reaches retirement age.  In combination with the raising standards of health care (at a higher cost), the percentage of GDP spent on healthcare will rise from 4% in 2007 to 18% by 2080.  This represents a major problem moving forward, where the big problems with the federal debt remain ahead of us.
Social Security:
Social security currently runs at a surplus, but represents a major part of future unfunded liabilities.  In around a decade, social security will start paying out more than it brings in.  Social security basically works by having current young working people pay for the elderly people's retirement, while young people in the future will pay for ours.  The combination of the shift of demographics to an older population (meaning less young people per retired individual), and the increasing life expectancy (meaning the longer amount of time young people must pay for the elderly) make this a huge source of future problems.  Additionally, the "savings" that social security has accumulated have been "loaned" back to the federal government, meaning there will be an immediate impact on federal deficit spending as soon as yearly liabilities exceed expenditures.
Debt Ceiling:
There are a couple of points of interest regarding the debt ceiling.  First, this is a hard cap on borrowing, beyond which the treasury is not allowed to issue new securities.  We are at a point where we need to borrow more money to pay interest on previously borrowed money.  If we don't pay the interest on these bonds, then investors will no longer lend us money going forward at our current interest rate, and borrowing becomes much more expensive.
One might ask what is the point of the debt ceiling if congress rubber stamps increases?  I believe that it was intended as a lever to force the government to address debt problems on a regular basis.  Election cycles make representatives focus only on near term issues, and long term problems (like the federal debt, global warming, and so on) are unable to be properly addressed.  I think the house is actually using the debt ceiling as it was intended to force the government to address the deficit problems.
One thing you will hear in the debate is the time frame we want to push the debt increases out.. Congress historically has extended the debt ceiling about once a year.  Keep that in mind when considering the different plans.
The Proposed Plans:  All plans are an attempt to reduce the amount of new debt added 10 years from now, so any numbers you hear are amortized over a decade.  Some projections say that the debt will increase by about 15 trillion dollars over the next decade.  We will use that as a baseline to evaluate the deals proposed.
The Simpson Bowles Plan:
President Obama created a bipartisan commission to provide long term solutions to budget problems.  This commission came up with comprehensive reforms to address social security, health care, and tax reforms that would result in the long term solvency of the federal government.  I would have personally strongly supported this plan, but the results were ignored by the president, and nothing came of it.  Perhaps it will be a basis of a bill following the next election cycle.
The Grand Bargin:
When it became clear that the house of representatives wouldn't raise the debt ceiling unless it was combined with some attempt to address spending problems, there was a bipartisan effort to decrease the debt by 4.5 trillion over the next decade, thus limiting debt increase to a new cap of approximately 22 trillion.  House republicans are insisting on a dollar for dollar exchange of debt ceiling increases for spending cuts over the next decade.  The bill would have included 3.5 trillion dollars in spending cuts, along with 850 billion dollars in tax increases.  The tax hikes would have come right away, while the cuts would have come towards the end of the decade (with only a few billion dollars actually cut in the first few years).  I think talks broke down when republicans became concerned that paper cuts wouldn't materialize in future classes of congress (who would be asked to make those cuts), and democrats insisted on increasing tax increases to 1.2 trillion dollars.
The Reid and Boehmer plans:
Both the Reid and Boehmer plan are based on two principle demands of the house republicans.  First, a dollar for dollar increase of the debt ceiling, and second no new taxes.  The Reid plan actually calls for deeper cuts than the Boehmer plan, the reason behind that being allowing the next debt fight to happen after the next election cycle.  There is one major problem with the Reid plan, in that about a trillion in "cuts" are from ending the wars in Iraq and Afghanistan, which many argue are savings that would be occurring anyways.  If those cuts were ignored, you'd basically have the original Boehmer plan, which were the collection of cuts broadly agreed to in the grand bargin.  The senate was planning on rejecting this plan anyways, so republicans tacked on a "balanced budget amendment" to the constitution, something broadly supported among conservatives.  So the current squabbling over the proposals centers around one core issue... the democrats don't want to face debt reduction again in an election cycle, because it is a losing issue for them, while republicans want to use this political pressure to extract deep cuts in spending.  I think if democrats offered the Reid plan with real cuts instead of bogus war cuts, you'd probably find a compromise acceptable to both sides.

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