Tag Archives: reality is not negotiable

Perspectives on last week’s debt debate: two sides of the same coin

How the “left” sees the recent debt ceiling debate/crisis…

And how the “right” sees it…

Is it any surprise that the politicians had a hard time finding a middle ground? They don’t see eye to eye on what the problem is in the first place.

Also, what’s with this “super committee” that’s lacking any deficit hawks? Or Rep. Jason Chaffetz, for that matter? No, seriously. Why is he not on it.

In the meantime, Utah has its act together. Wonder if the feds might take a page from our book?

(h/t to Geeks are Sexy)

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Here are the facts: you decide what they mean.

From the Washington Post, a comparison of budget proposals and their effect on US debt.

From the Washington Post, a comparison of budget proposals and their effect on the US deficit.

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Entitlement Reform: Start with Social Security

INFOGRAPHIC - Why Social Security Needs To Be ...

Image by Third Way via Flickr

It is almost cliché for my generation to joke that  Social Security will be gone before we retire.  It may be a stretch, but it really is no joking matter. Social Security is in a bad way, and it is getting worse.

The number of Social Security recipients is  growing faster than the number of people paying into it. It is a likely scenario that the Social Security trust fund (which doesn’t really exist, anyway) will be gone by the time I stop paying in and start asking for it back.

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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)

Killing the golden goose in Wisconsin

Greed: what is it good for?

In my other life, I play a member of one of the major political parties, and I regularly engage in issues, campaigns, and debates on a partisan level. In all of my activities, however, I try to maintain a level of civility that encourages healthy debate and discussion that allows for, when appropriate, compromise.

Right now, however, I find myself viewing the events in Wisconsin, the antics of the union antagonists, and it merits little in the way of compromise.

What happened in Wisconsin?

If you haven’t been paying attention (or, perhaps, you have been away from your t.v., internet, and radio, like these guys), allow me to sum up what’s happening, very briefly: Wisconsin, like a lot of states, is having budget problems aggravated by expensive pension liabilities growing faster than the money going into them. Rising costs, falling tax revenues.

Governor Walker, to fix the problem, is proposing that government employees, including teachers, pay into the pension funds, just like the rest of us do in the private sector. Further, to prevent the problem again, he’s changing the teacher’s right to collective bargaining.

As Governor Walker explained in an email to government employees,

Collective bargaining units will have to take annual votes to maintain certification as a union. Employers will be prohibited from collecting union dues and members of collective bargaining units will not be required to pay dues. These changes take effect upon the expiration of existing contracts.

And, taken together with the contributions to pensions and healthcare funds, it’ll save Wisconsin $30 million over three months and save 1,500 jobs this year.

The Empire Union Strikes Back

Naturally, unions representing the teachers, as well as a lot of unions not representing the teachers, protested. And the state legislators tasked with solving the budget problem? They fled the state for Illinois:

Inside the rotunda

Image by Jessie Reeder via Flickr

Fourteen Democrat state Senators have fled the state, forcing the state legislature to delay the vote by preventing a quorum. Holed up in Illinois, they have a list of demands they want met, including the right for unions to continue as-is with their collective bargaining agreements. Governor Walker wants to limit the wages that union bosses can insist on by tying it to the state’s consumer price index, or putting it to a public vote, and removing their ability to bargain for pension benefits. Only one of those Senators is needed to give the Wisconsin Senate their quorum and allow for the vote to proceed.

The fact is that the state doesn’t have the money. They either have to fire people, raise taxes, or government employees have to pay their share of their retirement, just like the rest of us with 401ks do.

In other words, the protests are, in large part, based on greed, not real concern for the general welfare. Unions are afraid of losing their ability to extract disproportionate shares of the state coffers for themselves and their members, so they’re doing all they can to bring the state to its knees. It has nothing to do with what is good for the state; it’s all about what’s good for the union.

Facts are facts

As it has been said more and more often, lately, “reality is not negotiable,” and these unions are not seeking the general welfare of the state. Rather, they’re looking out for numero uno–themselves. The money has run out, but they don’t care. They want their benefits, and it doesn’t matter that the state doesn’t have the money for them.

A friend articulated it well:

My employer sells widgets. Widgets have not been selling very well- so my employer doesn’t have as much money as he use to. My employer says to me “Look I’m out of money, so you have an option- take a pay cut or work somewhere else”

If you work in the private sector, that’s the end of story.

But if you work for the government (which, coincidentally, means you make pay above the average of the private sector…way above average. One study found that average pay for public sector work is $39.60, while the same job in the private sector pays only $27.42).  Then, you call the union rep, or the union rep calls you, and you go protest…during work hours.

Yeah. During work hours.

Despite the obvious–that we’re in a recession and if you want more benefits from the government, then your neighbor is the one who will have to pay for them–there are those out there who aren’t willing to give up primo benefits given to them for nothing.

And yet, there are very real questions about who is helping who when the union calls a protest:

There are deeply divided opinions and shifting allegiances over whether unions are helping or hurting people who have been caught in the recent economic squeeze. And workers themselves, being pitted against one another, are finding it hard to feel sympathy or offer solidarity, with their own jobs lost and their benefits and pensions cut back or cut off.

Killing the Golden Goose

Greed, I’m telling you. It pits you against your neighbors, against your employees, against your state, and against your country. While you receive higher wages, free healthcare, and a pension you didn’t contribute to, your neighbor is paying higher taxes to fund those benefits, looking for a second job, and hoping they don’t get hit by a car, because the insurance policy just expired, the insurance policy they can not afford.

In other words, you’re killing the goose that provides the golden eggs.

It’s unfair, and it’s immoral. But it’s the facts. When the union demands benefits far and above those the state can afford, not to mention far and above what the average person has in their private sector job, the state can, and should, require that government employees pay their fair share.

Greed: what is it good for?

(h/t to My Soapbox, Sen. Dan Liljenquist, the NYT, the MacIver Institute, and the Reason Foundation)

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