This snapshot of federal spending recently crossed my desk, and it is worth sharing.  It simply converts the federal numbers into an equivalent household budget.  The numbers are approximately correct for 2012, though they don’t have to match exactly to make the point.

Why the U.S. was downgraded:

• U.S. Tax revenue: $2,170,000,000,000

• Fed budget: $3,820,000,000,000

• New debt: $ 1,650,000,000,000

• National debt: $14,271,000,000,000

• Recent budget cuts: $ 38,500,000,000

Let’s now remove 8 zeros and pretend it’s a household budget:

• Annual family income: $21,700

• Money the family spent: $38,200

• New debt on the credit card: $16,500

• Outstanding balance on the credit card: $142,710

• Total budget cuts: $385

The example is excellent as far as it goes, but alas, here is the kicker: America’s unfunded liabilities — the promises of future benefits to its citizens, using the citizens’ own money — are currently listed at $117.4 trillion dollars (see U.S. Debt Clock).

Once again, let’s remove eight zeroes and see what we get for the equivalent future burden on a household budget.  You may want to be sitting down.

$1,174,330.

This is the household equivalent of the government’s unfunded liability largesse — promises of future spending on entitlements — and the burden it will impose on the children of a hypothetical family.

Nice gift to the kids, huh?

We’re doing exactly the same thing on a national level with entitlements, and we’re leaving an enormous burden to future, unborn generations.

Related posts:

1. Term Limits!
2. How to Fix the Health Care Mess
3. Contagion and Eurosclerosis

The debt of Portugal has fallen in value so much that a buyer can now get a yield of 16% on long term, ten year bonds.  Portugal won’t have to actually pay 16% until it has to borrow again (most likely when an old bond issue matures and has to be replaced), but at rates like that you can be sure that the increased cost of borrowing will cause even more borrowing.  It’s a swift ticket to bankruptcy—or rather default, because nations don’t have to worry about going through a bankruptcy process.

Wall Street and the media have been obsessed with the idea that the panic that hit Greece and now Portugal will spread further, causing a spiral of higher interest rates, compounding debt, and severe austerity that plunges the entire world into recession.

That’s not going to happen—Europe is already in a recession, but the US economy has been getting stronger—and in the near term the continent’s leaders will continue to grasp for short term solutions and kick the can down the road.  This has nevertheless been a heavy blow to the European Welfare State Model, and it’s obvious that the nations which spent beyond the limits of affordability are headed for significant pain.  So it’s more than a little surprising that our media have made so little effort to draw parallels with our own debts and deficits.

As a bloc the euro zone is less indebted than the U.S., and its government deficit is lower.  And we run up our debts in the same ways.  According to Census data published by the Wall Street Journal, 48.5% of Americans live in households that receive some form of government benefit, up from 30% in 1983.  And we share Europe’s great future problem, which is that we’ve promised larger benefits than we will possibly be able to afford once the Baby Boomers have retired in numbers and stopped paying significant taxes.

We also have patronage jobs, special tax breaks, tax fraud, subsidies, Medicare fraud, red tape, bureaucracy . . . . As with the troubled countries of Europe, these issues cause deficits and debt, and they also create inefficiencies and disincentives hurt employment in ways that are not obvious—but which are very powerful.

The immediate concern for Europe is the need to reassure investors so that they’ll continue to lend money to governments and banks, and interest rates won’t rise.  Numerous countries have been flouting an EU mandate to keep budget deficits within 3% of GDP, so many observers are suggesting tighter limits—0.5% of GDP—that are enshrined in the constitutions of each nation.

Most Americans (74%, according to a July poll by CNN) and most congressmen and senators (328 from both parties, in recent votes) want to do the same thing here—but in a way that allows additional spending during recessions and wars.  You can be sure that Congress is going to open up those floodgates from time to time, but a balanced-budget amendment to the Constitution would nevertheless slow the growth of the nation’s debt.   In 1997 a similar bill came within a single vote of passing both houses, because our legislators knew that they had not balanced** a budget since 1960.

**The 1969 budget was “balanced” with the help of deceit;  that was the year they introduced the “unified budget” gimmick, which claims FICA receipts as if they are taxes.

Related posts:

1. Putting It in Perspective

Our unemployment rate is high, the stock market is struggling, and sluggish growth seems to stretch far into our future. It might not be easy to take a step back and feel appreciative for the progress we’ve made, and the progress we’ve helped bring to the rest of the world; yet it’s very clear that we’re living in a time of peace and extraordinary plenty.

Two hundred years ago the average life expectancy, worldwide, was just 26 years. The life of man was nasty, brutish, and short—and poor. Incomes, wealth, and life expectancies had remained frozen for a thousand years—in fact, they had advanced little since Roman times.

Yet change and progress were stirring. In the next 100 years the life span of the average American male nearly doubled, amidst all the improvement in nutrition, working conditions, and living standards that such a great leap implies. Property rights, free markets, free societies, and the rule of law were driving prosperity across Europe and North America.

The lives of Americans in 1912—a century ago—were nevertheless quite poor by the standards of today. Fewer than 10% of the homes had telephones, and only 14% had bathtubs. Automobiles were rarer than hens’ teeth, and most workers—men, women, and children—labored from dawn to dusk.

Today even our poorest citizens are healthier and wealthier. Many have automobiles, and most have mobile phones—in fact, those who don’t have cell phones can get them free, via a Universal Service Fund program that’s funded by a tax on your phone service. The only people who go hungry in America are those who have not connected with the federal food programs (SNAP, Child & Adult (CACFP), Women Infants & Children, Elderly Nutrition, etc.), or with state welfare programs. Or with soup kitchens and shelters, or the massive (and studiously ignored) outreach of churches nationwide.

This bounty may be of little comfort to those whose savings are in CDs at 1%, or those who were laid off in a downsizing or merger—and have been eating away at their savings for years as they find another job or launch a new business, without any help from public assistance. We’ve been there, done that, and it’s no fun. And yes, most Americans felt wealthier five years ago, and they look back on the technology bubble of 1999 as the best of times. But if you were lucky enough to enjoy the best times in the history of the world, do you really have cause for gloom? _______________________________________________________________________________________________

In 2012 the U.S. stock market will rise more than 25% _______________________________________________________________________________________________

We should all feel rueful about the way we partied in the last couple of decades, but as dwarfs sitting on the shoulders of giants we have greater capabilities than we’ve ever had. Not just the greatest in history, but we—right here—have the greatest technological, agricultural, and humanitarian capabilities on today’s planet. We enjoy unparalleled freedoms, as well as protection from dictators, despots, and invading armies.

Nowadays the successes of China, India, Southeast Asia, and Brazil often cause anxiety about job losses, but let’s not forget that we used to wonder how we could possibly help the huddled masses of Asia, Africa, and Latin America. According to the World Bank the average life expectancy for the entire globe—including places like Somalia and Darfur—now stands at 69.4 years! And the truth is that the United States played an important role, by helping other nations understand the prosperity that flows from free markets and the rule of law.

This isn’t just a time of prosperity. It’s also a time of world peace. Sure, there’s trouble in Afghanistan, and there’s reason to worry about Iran and North Korea. But have you seen the history of the 20th Century? Some of the centuries that preceded it were even worse; during the Thirty Years’ War (1618–1648) the male population of the German states was nearly cut in half.

In 2012 you’ll see a grudging acceptance that these are not, after all, the worst of times. The pervasive gloom of Wall Street will lift, as will the ridiculously-depressed prices of equities. We’re going on record with a prediction that in 2012 the U.S. stock market will rise more than 25%, and that parts of the world will do even better.

In the words of the philosopher Bobby McFerrin, Don’t Worry Be Happy. And spread that cheer to your friends and neighbors; we’ll all have a good year in 2012.

_________________________________________________________________________________________________

No related posts.

The fear that Europe will drag the U.S. into a recession is ebbing, and it’s about time.  It’s likely that Europe is already in a recession, but we’re not—and there’s little reason why we should be, because our exports to the continent are only worth about 4% of our GDP.

So perhaps it’s now safe to point out the parallels between our problems and theirs.  Our debt isn’t as large (as a % of GDP) as that of the most-indebted European nations or Japan, but it’s higher than that of the most-responsible members of the EU.  And we share their great future problem, which is that we’ve all promised larger welfare benefits (Medicare, Medicaid, Social Security, etc, etc, etc) than we will possibly be able to afford once the Baby Boomers have retired in numbers.

It’s not just that we’re going to have a LOT more retirees.  We’re also going to have fewer workers;  the ‘Boomers earn a huge part of the nation’s paycheck, and few of them (us) have saved enough to generate any real tax revenue for Uncle Sam.

Put it another way.  We can fix Social Security with just a few changes (to the retirement age, the cost-of-living adjustments, and/or revenue collected), but the only thing that keeps the Medicare program afloat is the fact that there have been so few retirees in the system.  It’s now half a trillion dollars a year and growing like topsy, and when you put it together with other federal health programs the total is easily the largest federal spending category—and it will top a trillion dollars a  year in just a year or two.  Total federal tax revenue in 2011 was only $2.3 trillion . . .

When the program was created in 1965 few American lived past the age of 65, and Lyndon Johnson was able to sell it on a dubious forecast that 25 years later it would only cost $10 billion a year.  In that year Part A cost $67 billion, and since then it has multiplied many times over.

For more than 18 months the financial markets have been closely watching Greece, Portugal, Spain, Italy, and Ireland, worrying that their excessive debt would scare investors—who would then become unwilling to buy the bonds of those nations unless they paid enough interest to offset the risk.  You yourself might willing to accept just 1% on the CD of an FDIC-guaranteed bank, but how would you feel about lending money to Greece at 10%?

Interest rates on Greek bonds soared far higher.  If we, the United States, had to pay 10% on our debt we’d find ourselves paying out more than a trillion dollars a year in interest!  [Our total debt is now over $15 trillion, but we only have to pay interest on a bit more than $10 trillion; the rest of the debt is held by the Social Security and Medicare trust funds, which don't receive any actual cash interest.  It's just a bookkeeping entry;  a few more IOUs thrown onto a pile of worthless paper.]

Would a trillion-dollar interest tab matter?  It sure would—we’re currently paying a bit more than $200 billion in annual interest on our debt, so we’d have to come up with an additional $800 billion a year.  Instead of a deficit of $1.1 trillion in 2012 we’d have a deficit of $1.9 trillion.  Instead of jumping to $16 trillion a year from now our debt would almost reach $17 trillion, and larger debt would mean a larger interest payment.  It’s a vicious spiral upward, and nobody would be able to bail us out.

The ugly truth is that we can’t balance our budget in 2012.  You can’t cut spending by more than a trillion dollars, in one fell swoop, without massive layoffs and a ripple effect that runs through the entire economy.  We need to move very slowly and steadily toward a balanced budget, moving with such a convincing sense of purpose that investors will continue to confidently buy US Treasury bonds at low interest rates.

The obvious way to create that convincing sense of purpose is a balanced-budget amendment to the Constitution.

No related posts.

The Plymouth Colony would have starved the first years without help from local Indians.  But something happened in 1623 that unleashed the Protestant Work Ethic, and by 1635 most of the little  towns within 50 miles of Boston had been established.  The New World economy had taken off!

You can find the whole Plymouth Colony story at: http://en.wikipedia.org/wiki/Plymouth_Colony
Here is the section on the Economy:

Economy

For its first two-and-a-half years, the economy of Plymouth Plantation took the form of a communal system. There was neither private property nor division of labor. Food was grown for the town and distributed equally, according to William Bradford in Of Plymouth Plantation:

“

The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato’s and other ancients applauded by some of later times; that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort.[151]

”

By 1623, facing starvation Plymouth Plantation’s leaders took another course. Upon allotting private land plots it is evident that productivity increased. Again, according to William Bradford in his account:

“

So they beganto think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length, after much debate of things, the Governor (with the advise of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves; in all other things to go in the general way as before. And so assigned to every family a parcel of land, according to the proportion of the number, for that end, only for present use (but made no division for inheritance) and ranged all boys and youth under some family. This had very good success, for it made all hands industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.[151]

”

Plymouth Colony has been cited as an illustration of the benefits to productivity gained when comparing a communal system to that of a free market system. With the change in law to allow each laborer to keep the food he grew, productivity received an enormous boost, taking the colony out of starvation. Once again when land was given over to ownership by the working people, production increased significantly.^[152][153]

The highlights above are mine.

The Transcontinental Railroad was built from 1861 to 1869.  Between the EPA and the NLRB, do you think that railroad could even be built today?!  We need to unleash the American economy to restore Jobs and Growth to our Economy.  Sharing the wealth—the original communal system of the Pilgrims—government jobs, and a heavy burden of government regulation and expense will guarantee high unemployment for years to come.

Robert A. Armour

No related posts.

In a Wall Street Journal piece entitled Obama and the Politics of Condescension, Karl Rove asks the question, “Do we place our trust in the federal government or the people?”

This question is not a new one.

At the founding of the republic, it  was central to the debate.

Alexander Hamilton wanted a strong federal government, and Jefferson believed in state’s rights.  Hamilton sought efficiency; Jefferson once said, “I am not a friend to a very energetic government.”

Hamilton feared anarchy and thought in terms of order; Jefferson feared tyranny and thought in terms of freedom (source: U.S. Department of State).

Jefferson and John Adams prevailed, and for whatever flaws we may have as a country, we are blessed with three of the most profound political documents ever put to paper: the Declaration, the Constitution, and the Bill of Rights.

The world saw its first democracy, with a government selected by the collective wisdom of its people, rather than by inheritance (a monarchy), or by might (a dictatorship).

It was a great experiment in self-government, and it has worked.

In modern parlance, this trust in the common people would be characterized as “the wisdom of crowds”, played out in a political arena.

The core issue is whether we want a government that is a public master, or, as the Framers envisioned, a public servant, “deriving its just powers from the consent of the governed.”

The issue of government vs citizen will be central to the 2012 election, and it should be to all elections.

Thomas Jefferson founded what is now the Democratic Party.

He had an abiding trust in the wisdom and inherent goodness of all people.

These beliefs are evident in the Declaration, and they are a tribute to him, his party, and the nation those beliefs gave rise to.

The issue before us is whether we continue his trust in the common people, or to continue to vest yet more power in government.

Related posts:

1. How to Fix the Economy
2. How To Create Jobs

“Those who retire under the Texas counties’ Alternate Plan do much better than those on Social Security. According to First Financial’s calculations, based on 40 years of contributions:

• A lower-middle income worker making about $26,000 at retirement would get about $1,007 a month under Social Security, but $1,826 under the Alternate Plan.

• A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the banking model.

• And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security versus $5,000 to $6,000 a month from the Alternate Plan.”

Related posts:

1. The Milton Friedman Moment
2. The Keepers of the Flame
3. The Cost of Promises

The economy of 2012 should look very similar to the economy of 2011, and it’s likely that we won’t see any change in this low-growth environment for a number of years. Consumers and corporations have been spending less and paying down debt, and while this lower rate of spending restrains growth it also reduces the likelihood that we’ll build up the excesses that cause most recessions.

In other words, high unemployment and slow growth are not a reason to worry that we’ll slide into another recession.  They’re a reason to think that we could go for many years in the environment that we’re experiencing now.

We still need to address our 9% unemployment rate.  The President wants more infrastructure spending, and while I refuse to get aboard high-speed rail it’s certainly possible to create infrastructure jobs that have a lasting future impact.

Alternate energy is a sensible area of emphasis, because our foreign trade deficit is almost entirely made up of oil imports.  Homegrown energy will create homegrown jobs.  But from here forward we should focus on energy sources that don’t require government subsidies or mandates.  Natural gas is the cleanest of the fossil fuels, and we have trillions of cubic feet of newly-discovered gas that can produce electricity or power cars and trucks, if we can only get it to market.  The government’s role should be to encourage new uses for gas, and to remove any impediments to its distribution.

A gas pipeline is exactly the kind of infrastructure project that everyone should be able to support.  Yet a recently-opened gas pipeline from Wyoming to Oregon was forced to endure years of EPA, BLM, Historic Preservation, and Federal Energy Regulatoryreview, thousands of pages of detailed regulations, and many miles of detours.  Construction was halted from March to May of this year accommodate the mating season of a bird that is not endangered.

When the Chinese government wants to build a pipeline it draws a line on a map and starts digging.
Here we’ve discovered that there is no such thing as a “shovel ready” project.   And it’s even harder to get permission to produce oil, despite the fact that our consumers are going to burn huge quantities of the stuff without regard for whether it’s imported from Iran or produced here in the United States.

“The surface of the sea, which was perfectly smooth and tranquil, was covered with a thick, slimy substance . . . . The light breeze, which came principally from the shore, brought with it a strong smell of tar, or some such resinous substance.”

– George Vancouver, Captain Cook’s navigator, describing naturally-occurring oil seeps in the Santa Barbara (Calif.) Channel in 1792.  The seepage has been reduced by oil drilling.

The economy of North Dakota, home of the massive crude-oil-producing Bakken Shale, is on fire.
The state has an  unemployment rate of just 3.3 %.  For many years we’ve been outsourcing jobs by importing oil, but shale oil is putting people back to work;  and the same magic will touch the Gulf states when deep-water drilling is allowed to suck the oil out of the natural seeps that are polluting the Gulf of Mexico.

It’s true that greater oil production could lower prices and spur consumption, but the nation can respond by simply raising gas taxes to raise revenue while ensuring that gas prices do not decline.  In fact, our tax policy should generally be designed to discourage consumption and encourage savings.  The Value-Added Tax has been applied successfully in most other developed nations, and it would have the added advantage of taxing imported goods—while leaving exports untaxed.

The nation’s ports are essential to those exports, but today it would be impossible to re-create the ones we have.  If we want to reduce unemployment we’re going to need a nationwide assault—a program bigger than the moon landing—on creeping bureaucracy and regulation at every level of government.

So there are many options. And we haven’t even mentioned the simplest way to cut the unemployment rate, which is to address the fraud that has resulted from the decision to extend benefits to 99 weeks.  Workers now boast openly about it, including four 20-something men in a bar at a golf resort who confided to a friend that they’ve been working under the table “for cash” while collecting unemployment benefits.

Last winter we (the Lumbard Investment Counseling investment advisory board) shared a ski lift with a Boston-based brick mason who told us that he was living in a ski house with several other masons who collect unemployment benefits all winter, every winter.  They call themselves the Government
Ski Team.

Related posts:

1. How to Fix the Economy
2. Jefferson Democrats and the 2012 Election

This is not a partisan issue.  In the months after the Bush tax cuts, polls showed that Democrats favored a balanced-budget amendment by super-majorities larger than those of Republicans.  I used to have a link to that poll, but today can’t find any polls on the topic in those years—on Google or Bing.  Please write if you know of one . . .  

The wording of the recent (July 18 to 20) poll, item 25 on page 7, was: 

25. Would you favor or oppose a constitutional amendment to require a balanced federal budget?

Favor 74%

Oppose 24%

No opinion 1%

We’re just one small panic away from the situation that Greece got into, in which no one wanted to lend them money at interest rates below 11%.  At even 10% our interest payments on our debt would be a trillion dollars, and our government’s spending would rise from $3.8 trillion to $4.5 trillion.  This year we’ll collect about $2.4 trillion in taxes.

Still, this is best seen as a moral issue.  Back in the good old days parents tried to leave an inheritance to their children.  Are we really planning on sticking them with a gigantic debt to the Chinese?  Really?

Related posts:

1. Problems With a Balanced Budget Amendment?
2. Balanced Budget Amendment Pros and Cons

Alan Parks, President of Americans for a Balanced Budget Amendment, answered all the objections with this letter, which was given a nice placement on the editorial page: 

Regarding your editorial “GOP Balancing Act” (July 19):  The 1997 effort to pass a balanced-budget amendment in Congress failed by a single vote because our legislators knew that they had not balanced a budget since 1960. The 1969 budget was “balanced” with the help of deceit; that was the year they introduced the “unified budget” gimmick, which claims FICA receipts as if they are taxes. Since 1997 we’ve had two balanced budgets, in the Internet-bubble years of 1999 and 2000, and Congress has added $9 trillion in debt. Our legislators are incapable of fulfilling their primary duty of ably managing the purse strings of government. They need external pressure from the Constitution.

Most of your arguments against a balanced-budget amendment (defense spending could be cut, taxes could be raised) are really arguments against balanced budgets. Yale professor Peter Schuck adds some concerns about legal issues (“The Balanced Budget Amendment’s Fatal Flaw,” op-ed, July 22), but all of those problems have long since been navigated by the 49 states that have balanced-budget language in their constitutions.

Your fears of sharply higher taxes can be soothed by reading the text of the Senate balanced-budget amendment bill, S. J. Res. 23, which includes a cap on spending at 18% of GDP (previous versions had it at 20%). This percentage is the key issue in the entire budget debate. We have almost never, aside from 1944, 1945 and 2000, been able to collect more than 20% of GDP in taxes, even when the top tax rate was set at 91%.

Alan Parks

President

Americans for a Balanced Budget Amendment (http://balanceourbudget.com/)

Georgetown, Texas

Two other readers chimed in: 

“A better budgeting approach would be to tie spending for the coming year to actual receipts in the preceding year. Such a reality-based approach would also have a countercyclical effect on federal spending, since in the first years of a recession, spending would be pegged to high receipts from the preceding boom.”

Michael M. Segal

Brookline, Mass.

 

“I used to share the Journal’s fear that a balanced-budget amendment would be used as a fig leaf for big spending: “Gee, I didn’t want to raise taxes, but the Constitution says I must.” But as things now stand, government can vote for new programs to mollify certain constituencies, while not having to stick other constituencies with the bill. We simply borrow the money to distribute to the groups to which the sponsoring politicians wish to pander.

We now have a situation in which public goods are essentially free. Demand is unlimited for free goods. If, however, someone had to pay for new government programs, and those programs could be assigned a cost in tax dollars, terms most taxpayers can understand, we would finally have some real opposition to the growth of government. Spending would be subjected to cost/benefit analyses in which the cost is real, rather than zero.

While crafting a balanced budget in the heat of debt-ceiling negotiations may not be advisable, such an amendment, carefully considered, seems necessary if we are to return to anything resembling fiscal sanity in this country.”

Mark M. Quinn

Naperville, Ill.

Related posts:

1. Balanced Budget Amendment Poll
2. Problems With a Balanced Budget Amendment?