Monthly Archives: March 2011

Adding up the Federal Balance Sheet

Click to see larger image.

Do you know your net worth? If you add up all your assets (cash, property, etc) and subtract all your liabilities (debts), do you know what you are worth?

As a person, your net worth on paper doesn’t really account for your intangibles, like personality, education, or dashing good looks. Just your value if you sold everything you own.

Now how about the United States?  What is the net worth of our “of the people, by the people, for the people” government? If we were to add up all the assets and liabilities, what would our country be worth (or owe, as the case may be)?

The question matters. Though we hear a lot of talk about deficits, earmarks, and budget cutting, there is a world of difference between what politicians usually deal with–discretionary spending–and what is the biggest debts on the US balance sheet–the entitlements.

Let’s look at the stuff we hear a lot about: cutting  the discretionary spending in the federal budget. In reality, this is one of the smaller items on the federal balance sheet, but it’s the one that gets the most play in the news.  For example, look at this visualization by William Gross:

Look at “Non-Defense Discretionary” on line three of this (extremely) simplified  federal budget. In 2011, non-Defense Discretionary items will make up just a quarter of the budget. Over the last 40 years, it makes up on average only 23%. I doesn’t change that much. In other words, when we hear about politicians cutting discretionary items, they’re just chopping at the leaves, but leaving the trunk relatively unscathed.

That trunk is the other 75% of the budget. It’s stuff that Congress doesn’t mess with, can’t mess with, or, and here’s the kicker, is afraid to mess with. We’re talking entitlements, defense, and interest payments on the debt the United States owes to creditors. This means Medicaid, Medicare, Social Security, the Departments of Defense and Homeland Security, and, of course, interest payments on debt to, increasingly, people who live overseas and have loaned the US government money.

Of those, the scariest, the piece of the budget that is the largest, and that is going to grow the fastest in the coming decades, too, is the entitlement part. It’s Medicaid, Medicare, and Social Security. And it’s not even funded. The Congress has promised these benefits to people without coming up with a way to pay for them.

Remember, were talking liabilities, here, and unlike Defense spending, which has been fairly constant over the last forty years, entitlements will grow at a rate faster than tax revenues.  Because they are unfunded, and because they will grow rapidly over the coming decades, the government will need to borrow to pay for them. As  a result, as they grow, they’ll be paid for with more debt, which will increase the size of the interest payments.

Check it as Gross explains the danger:

The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ­– it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.

Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.

What would happen if we threw in agency debt and student debt, too, liabilities that the federal government insures?  Add another $65 Trillion to the debt side of the balance sheet.

Oh, and what about the assets side? Well, if our GDP is $14.9 Trillion and our tax revenues are estimated at about 35% of GDP, then do the math: we’re on track to never pay down our debt.

Indeed, because entitlement costs are going to continue to grow, and faster than inflation, sometime in 2040, mandatory budget items will exceed government revenues (or taxes collected).

Ouch. As Gross says, were out Greeking the Greeks with our debt, here.

In the real world, when things get this bad for a company, or for a person, they become insolvent. Since were talking about a country here, and not just any, but one of the most successful countries, bankruptcy is not exactly an option. It would destroy the world economy.

Instead, Gross anticipates four avenues the government can take to diminish it’s debt problems, none very attractive, and none very wise:

  1. Contractual abrogation. In other words, it will stop paying its debts and honoring its contracts. Extremely unlikely.
  2. Speeding up and increasing inflation. Dramatically. He thinks this is likely, but not sufficient.
  3. Push down the value of the dollar. Already happening.
  4. Decrease Treasury yields to historic lows, penalizing savers, and hope not one complains.

Or they could just reform entitlements. Entitlements are the heaviest weight on the federal balance sheet, and they are the part that will grow over the coming decades. Get entitlements under control, and suddenly the federal balance sheet is more manageable.

Who’s going to take it on? It’s political suicide for any serving politician to take on entitlements, and I doubt any of them currently serving has the courage, or the brains, to figure out how to do it.

Maybe it’s something that takes a whole generation. Maybe it’s time for the Baby Boomers to step forward. As Michael Kinsley recently wrote in The Atlantic Monthly, maybe it’s time for the descendants of the Greatest Generation to step forward and take one for their kids. Maybe it’s time to take one for the team:

So what do you give the country that has everything? You give it cash. The biggest peril Americans now face isn’t Islamo-fascism. It’s our own inability to live within our means. It would be nice to give our country the wisdom and self-discipline to stop running up the credit card. And we should try. But it’s unlikely that we can remake the national character (including our own) in 19 years. What we can do is offer a lecture and a fresh start. We should pass on to the next generation an America that’s free from debt. Instead of ignoring it, or arguing endlessly about whose fault it is and who should pay for it, Boomers as an age cohort should just grab the check and say, “This one’s on us.”

(h/t to PIMCO)

Fukushima: should people panic…yet?

How bad is Fukushima‘s radiation? It seems like each day brings a new report about contamination in food supplies, water, or a cloud blowing towards north America.

How much radiation is it, though, relative to what we are exposed to daily? Relative to Chernobyl, the poster child for a nuclear nightmare?

Is it bad enough for us to reconsider using nuclear power as a source of energy?

(h/t to Information Is Beautiful)

Jack Daniels explains the deficit (a la Politicalmath)

Because it’s been one of those days, I give you a lesson in the federal deficit.

Book Review of “Prophets,” a space opera in the 26th century

And now, for something completely different…

I occasionally (ok, frequently) read books purely for the fun of it. Often, they are science-fiction. Just because I like it.

Recently, I was sent a copy of S. Andrew Swann‘s new book “Messiah,” a space opera set in the 26th century. Since it is the third book in the series, I had to go back and start with the first book, “Prophets.”

I wrote a review for the science-fiction/fantasy book review site Walker of Worlds.

Swann spins a tale that is cinematic in vision and has echoes of Dan SimmonsHyperion series. He fills the story—equally mystery, cloak and dagger, political intrigue, and science-fiction—with characters that are mercenaries, scientists, priests, A.I.s, aliens, spies, saboteurs, and mutants. And there are also, of course, lots of space ships with faster-than-light travel drives (what would space opera be without that?). Almost none of the characters are clearly hero or villain, and each is a well drawn composite of traits that are likeable and flawed. Their interactions are unpredictable and gripping, each pulled by the plot in ways neither they, nor the reader, expects. By writing his characters credibly, and not balking at their pain or suffering, Swann creates a story that is both enjoyable and that the reader cares about.

Check out the whole review there.

Atlas Shrugged coming to a theater near you. Not a minute too soon.

More than fifty years after Ayn Rand argued that government could tear an economy apart by trying to “do good,” her hallmark novel Atlas Shrugged is coming to at theater near you.

Some think it’s not a minute too soon.

“Being conversant in Ayn Rand’s classic novel about the economic carnage caused by big government run amok was practically a job requirement,” writes Stephen Moore in the Wall Street Journal about working in public policy at the conservative think tank Heritage Foundation. “If only “Atlas” were required reading for every member of Congress and political appointee in the Obama administration. I’m confident that we’d get out of the current financial mess a lot faster.”

Written with fewer pages than the Affordable Healthcare for America Act, the novel is more readable and perhaps more prescient. And, because the book has finally, fifty years after publication in 1957, been produced in cinematic format (i.e. a movie), politicians may not have any excuse not to catch the main points.

Points such as:

The stimulus programs of the last couple years were created on the premise the government spending will produce economic growth. Where does that money come from? Two places: the government can print it or the government can borrow it. The first risks inflation and the second has to be paid eventually, ostensibly by tax dollars. Tax dollars are dollars taken out of the economy.

Enter Frederic Bastiat and “That which is seen, and that which is not seen.” Sure it’s great if the government puts money into the economy, but it is not without effect. It is spent, which creates products, services, and boosts the economy. That is what is seen. On the other (invisible) hand, what is unseen is that the money isn’t used by those who produced it. It has to come from somewhere else-a taxpayer, who will not be able to spend the money. It is taken from them, by force, and redistributed to whomever the government decides needs it more than the original producer. Further, by taking the money from the taxpayer, we decrease his incentive to produce, and spend, more.

If economics has taught us nothing, it has shown that the market is better at picking winners than the government. Putting government bureaucrats and pandering politicians in charge of picking winners just does not work.  (See also: Adam Smith) (Unless you own G.E. stock…)

Which leads to the next point:

The counterintuitive part, at least for you guys who graduated near the top of your classes at very prestigious law schools and made a lot of money in litigation or bond-counsel work or whatever but have not spent a lot of time selling hotdogs or landscaping or painting houses, is this: Profits are evidence of the creation of social value, not deductions from the sum of the common good. Washington totally flubbed that one during the health-care debate. Enormous profits come from the creation of enormous social value. Exxon, for instance. Americans may not have cozy feelings toward Big Oil, but given a choice between free gas for a year from the local Exxon station or lunch with a bigfoot politician, most Americans would just pick up a Slim Jim on their way to fill up on gratis high-test and motor on down the road and take a rain check on the coq au vin with Senator Snout.

Thanks, Mr. Williamson. Some more points:

  • Put lipstick on a pig, (or a law), and it’s still a pig. Call it Affordable Care, but it’s just semantics–a bad law is still a bad law.

For the uninitiated, the moral of the [Atlas Shrugged] is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

And that’s just to start.

In one of my favorite parts, quoted by Moore in his WSJ review, John Galt, as government bureaucrats plead for his help to save the economy, calls for the abolition of the income tax:

Galt: “You want me to be Economic Dictator?”

Mr. Thompson: “Yes!”

“And you’ll obey any order I give?”


“Then start by abolishing all income taxes.”

“Oh no!” screamed Mr. Thompson, leaping to his feet. “We couldn’t do that . . . How would we pay government employees?”

“Fire your government employees.”

Oh, no!”

Comments Moore:

Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax “for purposes of fairness” as Barack Obama puts it.

The book, and the movie, too, if reports are to be trusted, bear an uncanny resemblance to our times. It was written, after all, to take place in “the day after tomorrow.”

About the Movie

Synopsis of the film from the film’s site:

Dagny Taggart (Taylor Schilling) runs Taggart Transcontinental, the largest remaining railroad company in America, with intelligence, courage and integrity, despite the systematic disappearance of her best and most competent workers.

She is drawn to industrialist Henry Rearden (Grant Bowler), one of the few men whose genius and commitment to his own ideas match her own. Rearden’s super-strength metal alloy, Rearden Metal, holds the promise that innovation can overcome the slide into anarchy.

Using the untested Rearden Metal, they rebuild the critical Taggart rail line in Colorado and pave the way for oil titan Ellis Wyatt (Graham Beckel) to feed the flame of a new American Renaissance.

Hope rises again, when Dagny and Rearden discover the design of a revolutionary motor based on static electricity – in an abandoned engine factory – more proof to the sinister theory that the “men of the mind” (thinkers, industrialists, scientists, artists, and other innovators) are “on strike” and vanishing from society.

From the Foundry:

The film covers Part I of the three-part novel, condensed into just 102 minutes. (Parts II and III are to follow in sequels, the producers say.) The scenes that are included give a good sense of the book’s beginning, though it is too short to allow much development of the characters and their relationships. The foundational plot mystery of successful businesspeople going missing one after another is cleverly established, and the strong performance of Grant Bowler as Rearden supplies backbone.

Fans of the book will find some enjoyable, if brief, nods to rich portions of the book that were left out, including the back story of main characters Dagny Taggart and Francisco d’Anconia. Keep an eye out for that famous cigarette with the dollar sign on it.

According to Ron Rodgers of Rocky Mountain Pictures, the film will come to Utah at the end of April or the beginning of May at Megaplex and/or Cinemark Theaters.