Posts Tagged ‘public debt’

For some time, the Institute for Truth in Accounting has been beating the drum of “accounting truth” in government finances. Recently USA Today picked up on their claim that true federal deficits and debt are several times larger than the official numbers. They ran the numbers and found that “the government ran red ink last year equal to $42,054 per household — nearly four times the official number reported under unique rules set by Congress.” In addition, “Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.”

The reason for the difference between these numbers and the official ones is that the official numbers exclude the cost of promised retirement benefits: Social Security and Medicare. From the story: “Jim Horney, a former Senate budget staff expert now at the liberal Center on Budget and Policy Priorities, says retirement programs should not count as part of the deficit because, unlike a business, Congress can change what it owes by cutting benefits or lifting taxes.”

Yes, but will they? It seems to me that the “real” set of numbers is some weighted average of the official and full numbers, where the weight is the probability that Congress will act to reform retirement entitlements before they drag the official deficit even further into the red. Medicare is already losing money.

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President Obama has just announced his nominee to be the next Secretary of the Commerce Department. In the WSJ‘s words: “President Barack Obama will nominate John Bryson, a senior adviser to the private-equity firm Kohlberg Kravis Roberts & Co., to be his next commerce secretary.” The Journal continues:

Mr. Bryson, one of 20 senior advisers to KKR, is the former chairman and chief executive of Edison International, a publicly traded power company and the parent of Southern California Edison and Edison Mission Group. He also co-founded the Natural Resources Defense Council, an environmental-advocacy group, and has been a member of the U.N. Secretary-General’s Advisory Group on Energy and Climate Change.

I had not heard of Mr. Bryson before this nomination. People who found “environmental-advocacy group[s]” make me a bit nervous—since such people are sometimes rather longer on the advocacy side than on the scientific side of policy—but I am sure he is an able and capable person.

My question instead is why he is needed at all. Why, in the twenty-first century, when we have a globally connected world with billions of trading partners making trillions (or more) non-centrally-coordinated decisions every day, do we have need for a person to oversee all of this? Does he believe that he will be able to make better decisions from atop his perch in Washington, DC about where people should allocate their scarce resources, which of the options they face are those of which they should avail themselves, which people, businesses, groups, companies, institutes, funds, and organizations should trade or associate with which, what they should trade, and on what terms they should associate, and so on, than the individuals and groups themselves would make?

According to the Journal, a White House official said: “The president is confident in Mr. Bryson’s ability to lead the department and promote job creation, economic growth, sustainable development and improved standards of living for all Americans by working in partnership with businesses, universities, communities and our nation’s workers.”

I confess I am rather skeptical that Mr. Bryson, however able he is, will contribute positively to any of those objectives. This is not an indictment of him personally; it is instead an indictment of the rather voluminously inflated estimation some seem to have of human beings’ ability to consciously design and coordinate large-scale human social institutions. Even if Mr. Bryson were literally the smartest person on the planet, his ability to “promote job creation, economic growth, sustainable development and improved standards of living for all Americans by working in partnership with businesses, universities, communities and our nation’s workers” would be orders of magnitude inferior to the ability to do those things of uncoordinated individuals and private parties acting in competitive markets.  

The Great Mind Fallacy, it would seem, strikes again.

I say cut not only this Secretary’s job, but the entire Commerce Department and its $8.8 billion budget. When we are more than $14 trillion in debt, it would have to have a rather astonishing rate of return on its investment to justify its continued existence. Given the systemic liabilities it faces, I am skeptical it meets that threshold.

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I had a recent post on the unfunded liabilities burden in the states. Related to that post–and the $3 trillion in unfunded liabilities–Steven Greenhouse has an interesting piece in today’s New York Times that explores what might be an emerging trend: “Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labor unions, particularly those representing government workers, in collective bargaining and politics.”

While the article focuses on Republican governors (e.g., Scott Walker and John Kasich, respectively, the newly inaugurated governors of Wisconsin and Ohio), it also examines the efforts of Andrew Cuomo (New York) and Jerry Brown (California).

Obviously, this has the labor unions up in arms.

But labor leaders view these efforts as political retaliation by Republicans upset that unions recently spent more than $200 million to defeat Republican candidates.

“I see this as payback for the role we played in the 2010 elections,” said Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, the main union of state employees. Mr. McEntee said in October that his union was spending more than $90 million on the campaign, largely to help Democrats.

“Now there’s a bull’s-eye on our back, and they’re out to inflict pain,” he said.

Undoubtedly, politics has a lot to do with this. But the fact that Democratic and Republican governors appear to be following a similar strategy suggests that there is something else going on.

Unlike the federal government, the states are in an interesting position as a result of their economic constitutions. While there is great variety, all states (other than Vermont…go figure…and arguably North Dakota and Wyoming) have balanced budget requirements on the books. Of course, these requirements vary along a number of dimensions (e.g., what constitutes a balanced budget? What enforcement provisions exist?). The National Conference of State Legislators has an interesting report on the variety of balanced budget requirements in the states for those of you who may be interested (download here).

As the report concludes, despite the variety of provisions at the state level, there is broad adherence to the norm of balanced budgets:

Considering the lack of specific constitutional mandates and enforcement structures, state compliance with the principle of a balanced budget is notable. Restrictions on debt play a part, but are an insufficient explanation for the fact that even states that can legally carry a deficit from one year to the next try to avoid doing so. It appears that the political convention that state budgets are supposed to be balanced is its own enforcement mechanism.

As the new Congress assumes power in Washington, one can predict that there will be some symbolic efforts to control expenditures (waste, fraud and abuse…be afraid, very afraid. Non-defense related discretionary spending…something wicked this way comes). But one wonders whether there can be sufficient movement toward achieving fiscal sustainability without the imposition of a new economic constitution for the federal government. Unfortunately, it is difficult to imagine that elected officials who benefit greatly from the ongoing expansion of federal spending would follow the lead of Ulysses and bind themselves via a constitutional amendment.

As Jon Elster notes (in Ulysses Unbound, p. 143):

“Because of the privilege of the present over all future dates, Congress will, like St. Augustine, tell itself that balancing the budget is a good idea—in the future. But when the future arrives, it always does so in the form of a new present, to which the same reasoning then applies.”

A balanced budget amendment could overcome this problem, Elster suggests, but adoption would likely require that it only take effect in a future Congress—a current Congress safeguarding their benefits while binding future Congresses. This strategy is complicated in the United States “because of the variable and uncertain duration of the amendment process.” But without such provisions, can one expect that members of Congress—regardless of their partisan stripe—will confront the problem of fiscal unsustainability with the same courage that will (hopefully) be exhibited by the states?

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The Fiscal Responsibility Debate Ctd.

Former OMB Director Peter Orszag has written a well-reasoned piece on the co-chair’s proposal on Social Security (see today’s NYT). Money Quote:

If Congress were to take all four of these recommended steps, it could not only eliminate the long-term deficit in Social Security but also make the system much more progressive. Even compared with the benefits promised by the current system, the recommended benefits for the poorest 20 percent of recipients would increase by about 5 percent, while those for the wealthiest retirees would fall by almost 20 percent.

One may disagree with his conclusions, but at least he has read the report and decided to report on what he read.

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Professor Krugman has an opinion piece in the NYT today chastising the “Hijacked Commission.” No one who has read Dr. Krugman’s columns before will be at all surprised with his take on the National Commission on Fiscal Responsibility and Reform. It may be “bipartisan,” he notes, but this simply means that the commission will be a compromise between “the center-right an the hard-right.”

Krugman opens his indictment with the following observation:

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

This is a rather selective reading. The earlier pages discuss the need to reduce the debt (or soon face $1 trillion a year in interest payments) and move toward a balanced budget, lest we push the costs of our decisions on to future generations. Before discussing revenues, the report then proposes: “Bring spending down to 22% and eventually 21% of GDP.”  It is within this context that the co-chairs propose that revenues be capped at or below 21% GDP.

Professor Krugman’s question, to repeat, is: “why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?” The answer: because the limit it sets on revenue matches the limit it sets on expenditures (hence the goal of balancing a buget).

Any exercise of this type must begin with an assumption of how large the government should be relative to GDP and then explore means of reaching this goal. This would be true even if the commission had assumed 30, 40 or 50 percent of GDP. Of course, one can only speculate that there would be fewer complaints from Professor Krugman had the commission assumed that government should spend 50 percent of GDP and then proposed to cap revenues at this level.

On the issue of revenues, as noted in an earlier post, the co-chairs’ report presents three broad options for revenue reform. Within one of the options, it provides four different combinations of  marginal rates and eliminated tax expenditures/exemptions. One of these three involves eliminating all expenditures (another, for  example, maintains most of the major expenditures).  Dr. Krugman’s take:

They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

Once again, of the three broad options discussed, one variant of one option does what Krugman suggests. By the way, this is also combined with a chart that shows who enjoys these expenditures and, contra Professor Krugman’s assertion, most of the current benefits are claimed by the top quintile not the middle class. This is nothing new, by the way. There is ample empirical support for this claim that our system of tax expenditures and exemptions strips much of the progressivity out of the tax system.

On the Social Security proposals, Dr. Krugman like others who likely wrote their critiques before reading the report (or wrote their critiques assuming, quite rationally, that no one else would read the report) focuses on the gradual increases in the retirement age without saying a word on what would be the greatest change: progressive indexing. Once again, this would retain the benefits for lower wage workers while significantly reducing benefits for upper income workers.

Why does this feature of the reform proposal go unaddressed? The simple answer: the closer you come to transforming Social Security into a means-tested policy, the more you subject it to the political dynamics that have limited the expansion of other welfare programs (or, in the case of AFDC, led to its elimination). Retain its universal benefits, and you retain the broad base of support that will lead to its ongoing expansion (until it collapses under its own weight, of course).

I strongly suggest that readers of Pileus go and examine the report (available here). It is 50 pages of PowerPoint slides. Don’t rely on editorial writers or bloggers of any ideological stripe to do the work for you.

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Alan Simpson and Erskine Bowles foreshadowed some of the ideas currently being circulated within President Obama’s National Commission on Fiscal Responsibility and Reform with their co-chairs’ proposal (download here).

The work of the Commission is critical. The deficit is heading toward the 10.6 percent of GDP (the highest in the postwar period) and the debt is currently 94 percent of GDP, projected to break the 100% mark in the next few years. The major unfunded entitlement obligations are going to lead to collapse unless reforms are initiated soon.

To provide a quite and simplified overview of the co-chairs’ proposal (it is only 50 pages long, worth a read) let me say a few words about the spending and revenue sides.

On the spending side:

The goal is to reduce spending to 22 percent of GDP (and ultimately reduce it to 21 percent of GDP). This is to be achieved in a number of ways, including caps on discretionary spending (including $200 billion in cuts by 2015, split evenly between defense and domestic). There are also recommended reforms in medical entitlements (basically the list of incremental reforms that have been discussed widely in recent decades). For Social Security, the recommendations include progressive indexing (i.e., maintaining the current formula for low income workers but switching to the chained CPI for those above the 50 percent breakpoint) and increases in the earning cap combined with gradual increases in the retirement age (to 68 by 2050 and 69 by 2050).

On the revenue side:

The goal is to raise revenues to 21 percent of GDP. This is to be achieved by reducing marginal rates and, most importantly, eliminating some tax expenditures and exemptions (at the extreme, this could be worth $1.1 trillion).  The report provides a series of options. At the extreme, marginal rates drop dramatically (8%, 14%, 23%, and 26%) when combined with the elimination of all tax expenditures and exemptions. If one wanted to retain child tax credits, the EITC, and current mortgage interest, health and retirement benefits, the marginal rates would have to be higher. This is combined with a modest increase in the gasoline tax.

On the expenditure side, the Democrats have already declared the proposal DOA.

Speaker Nancy Pelosi  characterized the proposals as “simply unacceptable.” “Any final proposal from the commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare.”

Not to be outdone, AFL-CIO President Richard Trumka clained that the proposal told “working Americans to ‘Drop Dead.’”

Unsurprisingly, the GOP is displeased with the tax reforms.

A few initial comments are in order:

First, the goal of reducing government to 22 percent of GDP seems overly modest.  This was largely the level of spending exhibited during the 1980s and the end of the George W. Bush presidency. Reductions to 2000 level (18 percent of GDP) would seem to be within reach.

Second, the howling from Pelosi and Trumka is painful. The proposed changes in Social Security would have positive impacts on low-income elderly (they would retain the same COLA formula and the program would be there for them in the long run). The greatest negative effects would be felt by high-income earners (via progressive indexing and increases in the cap). The tax reforms—particularly if we eliminate all exemptions and expenditures—would shift a greater burden to upper income earners (the primary beneficiaries of the “hidden welfare state”).

If I could simply impose changes in Social Security, I would likely means test the entire program (and do the same with Medicare). I would eliminate the exemptions and expenditures from the tax code but retain slightly higher marginal rates to accelerate the movement toward a balanced budget. But given that we have to work within the world of the politically possible, this seems like a credible—if modest—first step.

Prediction: The political capital to be gained from opposing reform will prove far too attractive for anyone to pass up and the final report of the National Commission on Fiscal Responsibility will be stored safely in the Library of Congress only to be discovered by future historians hoping to document the decline of the Republic.


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Like many other people, I was underwhelmed by the recently released Republican “Pledge to America.” Longwinded, wishy-washy, and mostly tinkering on the edges.

I am not a member of the Republican Party (or any other party), and I am indeed one of those who fails to much difference of substance between the two major parties—at least on fiscal issues. There are differences on social issues, but, as I have argued before, those issues pale in importance to the fiscal reckoning that looms before us.

I am not alone in thinking this. In fact, I believe this cluster of fiscal concerns constitutes the core of what animates the Tea Party. It is what explains why they oppose some candidates, including some Republicans, and why they favor others, including some independents. Their surging influence gives me some hope that we might finally address this issue, and it is why I welcome their contribution.

But I am not here to defend the Tea Party qua party either. I want us to get our fiscal house in order—now. To that end, I humbly offer what I believe would be a winning, and indeed inspiring, agenda for an ambitious group of politicians.

Call it “The Principles of American Renewal”:

1. No new taxes of any kind.

2. No new spending of any kind.

3. An immediate, across-the-board 5% reduction in the budgets of every department, agency, bureau, institute, and program currently operated under the auspices of the federal government. That includes both “discretionary” spending and “mandatory” spending budget items.

4. Do the same next year, and then freeze all spending levels there unless a super-majority of both houses of Congress approves otherwise.

That’s it. It’s not much, but I think it has considerable virtues.

First, it does not require us to argue about which agencies, offices, etc. should be cut and which should not—cut them all, with proportionate equality.

Second, no one can claim, at least not credibly, that there is not at least 9.75% of fat (what two years of 5% cuts amount to) to cut in every single line of budget in the federal government.

The 2010 federal budget (October 2009–September 2010) entails spending $3.55 trillion dollars. So this policy would entail a 2011 budget of approximately $3.37 trillion, and a 2012 budget of approximately $3.20 trillion—a savings, after two years, of some $350 billion, bringing federal spending down to what it was all the way back in . . . 2008. Is anyone willing to claim that the federal government was just not spending enough in 2008?

Third, if Daniel Mitchell is correct (H/T Roger Ream), a policy like this would rapidly balance the annual budget, and it would be a good first step toward addressing our longer-term national debt.

Fourth, there are many, many households and business who have had to make similar adjustments. Many of them indeed have gone completely under and wish they only had to make a 9.75% adjustment over two years. So this pledge could enable its supporters to claim that they understand our economic difficulties and are willing to do their part.

There would be some obstacles, of course. This policy would require reform in some entitlement regulations, and special-interest groups would complain about their funding decreasing. But politicians could insulate themselves from the worst of the complaints by claiming, truthfully, that their hands are tied by the need for across-the-board reductions; no one is being singled out for special treatment.

A pledge to support a program like that, backed up with, perhaps, a promise to resign if a candidate voted otherwise, would, I preduct, be a winning one. If enough people got elected on it, it might also actually do some good in Washington, making it a win for the rest of us as well.

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The Only Issues

I mentioned in a previous post that we as a nation face two problems that are far and away the most pressing and menacing, and that almost every other problem—even all the rest combined—barely amount to a hill of beans in comparison. Those problems are: (1) our public debt, at the federal, state, and local levels; and (2) geopolitical instability and aggression. I think we need to address those two problems before we worry about anything else. And we must address them like grown-ups, who understand there is an external world with realities that we must face, not as intellectual children who believe that wishes, words, hopes, or dreams can make all of reality’s hard edges and all the world’s bad men go away.

Laurence Kotlikoff, professor of economics at Boston University, now tells us that the first problem is even worse than I feared. According to his recent arresting essay in Bloomberg, “The U.S. is bankrupt.” Using CBO data, Kotlikoff calculates the net present value of the United States debt to be $202,000,000,000,000. That is two hundred and two trillion dollars.

That is approximately $673,333.33 for every man, woman, and child in the United States.

That is approximately $2.7 million for every family of four.

And that is not considering the debt that each individual, or each family, has incurred on its own. So if you have a mortgage on your house, car, or boat, or if you have student loans or credit card bills, you have to put that on top of the debt the government has created for you.

Kotlikoff says the only ways out of our almost unimaginably bad fiscal nightmare—which is, in reality, he says, worse than that of Greece—are (a) immediate and permanent doubling of taxation at all levels; (b) radical, drastic, and immediate slashing of federal obligations (on the order of defaulting on Social Security, Medicare, and Medicaid completely); or (c) massive priting of money to “pay” the bills, leading to corresponding massive inflation. He predicts a combination of all three.

A fourth option he neglects to mention is (d), an aggressive policy of imperialism, whereby we conquer lands and territories, claim their assets, and use those assets to pay off our debt.

You don’t think (d) is possible . . . do you? Well, whether you do or not, it’s going to be some combination of those four. There are no other options.

We have been living in a fiscal fairy tale for a long time. The unprecedented wealth to which America’s political and economic institutions have given rise have also enabled us to develop and nurture a juvenile worldview of unreality, where wealth, production, goods, services, peace, and leisure are all naturally occurring features of the world—instead of fragile historical anomalies that must be carefully and diligently and continually maintained. Our wealth has allowed us to adopt adolescent economic theories that are the intellectual equivalents of “milk comes from the grocery store” and “money comes from the bank.”

At some point, adults are going to have to begin acting once again like adults, and do the equivalent of cutting up the credit cards. It is nice and fun and oh-so-freeing to live as if we had no responsibilities, as if someone somewhere else were taking care of things, as if we could act like children our whole lives. But we can’t. After decades of pretending we could, the real world is now crashing back down us with a vengeance.

Some are beginning to realize the gruesome reality we face. Koltikoff, for one, is sounding the tocsin; he is not the only one. But if his numbers are right—if they are even close to being right—it might well be too late.

Time to buy gold?

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Democrats heaped praise on the Congressional Budget Office during the health care debates (remember SpeakerPelosi’s  breathless excitement over the “scoring” from the “bipartisan” Congressional Budget Office?).  The CBO’s newest “Long-term Budget Projections” have not engendered the same level of attention…but it should. The report was released about a month ago and my guess is that it fell under the radar screens of loyal Pileus readers. So here are a few highlights for your consideration (the entire document is available here, and CBO Director Elmendorf’s brief presentation to the National Commission on Fiscal Responsibility and Reform is available here).

The CBO begins with a cheery review of recent events:

Recently, the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (as measured by gross domestic product, or GDP), a little above the 40-year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year—the highest percentage since shortly after World War II.

Yes, I know, we are in the greatest recession since the Depression. The CBO recognizes that budget deficits will likely decline markedly in the next few years. Nonetheless, the CBO notes: “over the long term, the budget outlook is daunting.” The retirement of the baby boomers (assuming any of us can retire) will drive entitlement spending. “Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.

The CBO develops its projections under two scenarios: an extended-baseline scenario and an alternative fiscal scenario.

The extended base-line scenario, is based on current law and the assumptions that (1) the health care legislation will have the anticipated effects on revenues and spending, the Bush tax cuts will expire as scheduled, and the alternative minimum tax (ATM) will cover a growing percentage of tax payers. Under this scenario, total revenues will increase to 23 percent of GDP by 2035 and grow substantially thereafter. On the spending side, “government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II.” In other words, the US would be primarily involved in the provision of insurance and the payment of interest on the debt. Debt held by the public would increase from 62 percent this year to 80 percent in 2035 while interest payments would increase from a current level of 1 percent of GDP to 4 percent of GDP by 2035 (essentially one-sixth of federal revenues).  (page x)

The alternative fiscal scenario—in my mind, the more reasonable one—assumes that some of the Bush tax cuts will be extended, the ATM will cover about the same percentage of taxpayer as today, Medicare reimbursements for physicians would increase gradually, and spending under the alternative scenario, and “spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario.” Under this more realistic scenario, debt would hit 87 percent of GDP by 2020. “After that, the growing imbalance between revenues and noninterest spending,  combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.” (page x-xi)

Indeed, under this scenario, in 75 years, revenues would reach 19.5 percent of GDP, expenditures would constitute 28.2 percent of GDP, leaving a fiscal gap of 8.7 percent of GDP (Table 1-3, p. 15).

In a sobering qualification (p. xi), the CBO states:

In fact, CBO’s projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy:

  • Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.
  • Growing debt would also reduce lawmakers’ ability to respond to economic downturns and other challenges.
  • Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.

The CBO elaborates on the fiscal crisis scenario (pp. 20-21):

higher debt could raise the probability of a fiscal crisis in which investors would lose confidence in the government’s willingness to fully honor its obligations, and thus, the government would be forced to pay much more for debt financing.  Interest rates might rise only gradually to reflect growing uncertainty about whether government debt would be fully honored, but other countries’ experiences suggest that a loss of investor confidence could occur abruptly instead. If interest rates on government debt spiked, the value of outstanding government debt would fall sharply. That decline in value could precipitate a broader financial crisis by causing large losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt. Experience in other countries suggests that resolving such a crisis would require fiscal policy changes that would be far more drastic and painful than if policies had been adjusted sooner to avoid a crisis.

One might suppose that such dire predictions would force a response from the White House or Congress.  Peter R. Orszag, OMB Director, used the occasion of the release to celebrate the role of the Affordable Care Act in helping to enact “substantial, long-term deficit reduction.” To be fair, he devoted a line at the end of his comments to the long-term scenario. In Congress, the majority broke from the practice of presenting a five year budget plan and presented a one-year budget resolution, which Speaker Pelosi described as “another key step . . . in restoring fiscal responsibility.” This decision was justified by the existence of the National Commission on Fiscal Responsibility and Reform.

When in doubt, create a commission. And as the legislative history of the current financial reform legislation reveals, be certain that you do everything humanly possible to avoid its findings.

And so, we return to a central question: On the assumption that we want to avoid the bleak scenarios painted by the CBO (one that has been presented on numerous occasions in earlier years) and that whatever the benefits of growth, we simply cannot “grow our way” out of the problem,  what are the options?

  1. Dramatic reductions in the core entitlement programs
  2. Dramatic increases in taxation
  3. Some combination of 1 and 2

Will elected officials–who dance to the 24 hour news cycle and whimper in fear of voters who have been assured that they can have endless entitlements and low taxes– be able to soberly face the long-term crisis and select from the limited set of options?

Is any of this politically viable absent a significant change in the popular expectations of government’s role in society and the economy?

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This past weekend the New York Times published an opinion essay entitled “The Very Angry Tea Party.” Its author makes two main claims: (1) Tea Party activists are very, very, VERY angry; and (2) they are subscribers to a “metaphysical fantasy,” believe in “the most egregious of fear-mongering falsehoods,” have a “passionate attachment to wildly fantastic beliefs,” and act out of an unreasoning fit of immature emotion just like “an enraged, jilted lover.”

This sounds just a wee bit overwrought (I won’t call it seething anger). But is any of it true? One cannot judge from the article, since it contains no actual analysis of the Tea Party movement or its members, no examination of their words or their documents or their arguments.

But did I mention that the author believes they are angry? In his article one finds all of the following:

  • “The Very Angry Tea Party” (the title of the article)
  • “seething anger”
  • “the anger of the Tea Party members”
  • “an enraged, jilted lover”
  • “the incubus of Tea Party rage”
  • “fierce anger that pervades its meetings and rallies”
  • “animosities”
  • “passionate anger of the Tea Party”
  • “exorbitant character of the anger Tea Party members express”
  • “such anger and such passionate attachment to wildly fantastic beliefs”
  • “galvanizing anger and rage”
  • “hysterical Tea Party incriminations”
  • “great anger”
  • “rage”
  • “fury”
  • “the rage and anger”
  • “atmospheric violences of propagating falsehoods”
  • “nihilistic rage”
  • “such rage”
  • “the anger of the Tea Party”

Why, they are so angry that they even have a “fierce logic”!

And the second claim, that they are so fundamentally misguided? The author claims that they are in the throes of “the deeply held fiction of individual autonomy and self-sufficiency,” believing in the “metaphysical fantasy” that “each individual is metaphysically self-sufficient, that one’s very standing and being as a rational agent owes nothing to other individuals or institutions”; the Tea Party activists are “manufacturing, and even inventing, the idea of a sovereign individual who becomes, through them and by virtue of them, the ultimate source of authority” (emphases in the original). They are, moreover, “suppressing to the point of disappearance the manifold ways that individuality is beholden to a complex and uniquely modern form of life.”

A straw man. No one literally believes that he is entirely self-sufficient, that he is not dependent on a community, that he does not need the cooperation and assistance of untold others to get the goods and services on which he daily depends. That indeed is one of the great glories of markets, a point made repeatedly by Tea Party activists, that markets require widespread and far-flung cooperation that is mutually beneficial.

And “inventing” the notion of a sovereign individual? Perhaps the author has not read John Locke’s 1690 Second Treatise of Governmentfrom which America’s founders, and many of the Tea Party members, take explicit inspiration—which argued that people were by nature both free and equal, and that this equality begins with their natural sovereign jurisdiction over themselves. Or perhaps he is not aware that the Tea Partiers today are drawing on quite a venerable tradition that includes, of course, the 1776 Declaration of Independence, but also includes the 1689 English Bill of Rights, the English Leveller movement of the 1640s, the 1628 Petition of Right, the 1320 Declaration of Arbroath, and indeed the 1215 Magna Carta. This tradition, and each of these documents and events, affirmed the independence of individuals from the state, the subservience of the state to its people, and the right of the people to demand redress when their state became destructive of their “natural”—i.e., antecedent to the state—rights.

These precedents and this historical tradition do not by themselves justify positions for which Tea Party activists stand, but they are sufficient, I believe, to warrant actual attention. Whatever else might be true of the Tea Part activists, they have not invented these ideas.

The author uses Hegel—yes: not Lilburne or Locke or Montesquieu or Hume or even Kant, but Hegel—to criticize the Tea Partiers by claiming that they fail to understand that all of us “are bound to one another as firmly as lovers are.” He claims that the “rage” of the Tea Party is a result of jilted love: “when our love goes bad I am suddenly, absolutely dependent on someone for whom I no longer count”; “All the rhetoric of self-sufficiency, all the grand talk of wanting to be left alone is just the hollow insistence of the bereft lover that she can and will survive without her beloved.”

But of course she can and will survive. Yes, the Tea Party activists feel betrayed by a government they believe should protect their life, liberty, and property, but has now instead come to be a chief threat to them; yes, not all Tea Party activists all have exactly the same beliefs; and yes, some of the beliefs of some of them may actually conflict with some beliefs of others. Sure, yes, of course. But that is true for all political movements—indeed, for all human associations of any kind.

The federal government has been growing in scope and authority for some time now, and recently the rate of that growth has accelerated enormously. By some estimates, the total net present value of our public debt totals some $130 trillion, or approximately $433,000 for every man, woman, and child in America. That, and not Tea Party anger, is what is “not just disturbing, but frightening,” and it, more than anything else, is what has animated the Tea Party. No metaphorical jilted lovers, no metaphysical fantasies: the cold, hard reality of a fiscally reckless government that increasingly looks out of control and is endangering the freedom and prosperity of this and future generations.

What is so mysterious about that?

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About a month ago, Jonathan Capehart asked, “Hey, Tea Party, why all the fuss?” He cites some evidence—rather thin evidence, but evidence all the same—that many self-identified Tea Partiers are at the moment in decent financial shape. So what are they upset about?

That is a bit of a disingenuous question, since much of the Tea Party complaint, as I understand it, is about the future consequences of our current fiscal trajectories. But if you want an answer to the “What’s all the fuss about?” question, you might start with “The Mother of All Bubbles,” published last week by Der Spiegel. It explains in some detail—in horrifying detail—just how close to the fiscal precipice we are.

The Euro Zone economies are not just interdependent: they are deeply interindebted. They are all massively in debt to each other, so much so, in fact, that if the bailout to Greece does not stanch the bleeding, an all-too-real possibility is that Greece will fail, followed quickly by Portugal, Ireland, Italy, and Spain, whereupon the stress on Germany, the economically strongest economy in the EU right now (though itself with enormous and rising debt), will find itself pulled into the abyss by the other European Union countries. If that happens, as Der Spiegel, puts it, “the euro would fall apart.” No one really knows what would happen then—but everyone agrees that it would be bad; very bad.

The even larger problem, however, is that “All of the major industrialized countries have lived beyond their means for decades. Even in good times, government budget deficits continued to expand.” This puts the lie to the “principle of hope” on which Der Spiegel argues Greece’s bailout rests: “hope that it will be possible to repay the debt that has accumulated in past years, that governments will manage to clean up their ailing budgets, thereby averting the worst, and that life will go on, just as life has always gone on, somehow, after earlier crises.” One is reminded of the string quartet continuing to play as the Titanic took on water: just pretend nothing is wrong; that will make it all go away.

But of course it will not go away. Without immediate and dramatic changes in fiscal policy, not only will the catastrophe come, but, to paraphrase Mencken, it will come good and hard. And I would not recommend putting much stock in the chances of “immediate and dramatic changes.” The only way these bailouts will work is if everything goes according to plan in the best way it could. All the dice have to come up sixes, and there are dozens, even scores, of dice. What are the odds of that?

If you are still inclined to let your hope spring eternal, consider these sobering facts: “The national deficits of the 30 members of the [OECD] have grown almost sevenfold since 2007, to about $3.4 trillion today. Their total debt burden has also grown dramatically, to a record-setting $43 trillion. In the euro zone, national deficits have even grown 12-fold in the same time period, with the euro-zone countries accumulating $7.7 trillion in debt.” All the “austerity” measures imposed on Greece thus won’t make any difference, because all of the much bigger countries are accelerating their assumption of debt.

So, when Greece, then the other PIIGS countries, then the entire euro zone all fail, will the United States federal government bail them out too? Der Spiegel writes: “The United States is still capable of fulfilling all of its obligations [according to "a strictly confidential IMF document, referred to internally as an early warning device"], but [the document] also points out the worrisome rate at which the national debt is growing.” Right.

University of Chicago economist Liugi Zingales has written recently about the “menace of strategic default,” in which homeowners in the United States realize that their home is worth substantially less than their mortgage, and they simply walk away. Zingales correctly argues that if this practice continues to grow, the repercussions would be far and wide. But two thoughts are apposite here. First, these homeowners’ situations bears striking, and startling, similarities to the situations of some countries. So how bad will it be once countries realize that they might just be better off walking away from all the debt?

Second, consider the interesting “tragedy of the commons” dynamic this introduces. There will be bailout money available from the EU, then from the US, for a short time. No one knows how long, but if a country in as bad a shape, and as bad a risk as Greece can get a $150 billion bailout, then why wouldn’t some of the other precariously perched countries, who know they’re going to fail sooner or later anyway, not decide to crash now so that they can get their bailout while there are still bailouts to be had?

The interdependency, and interindebtedness, of the world’s countries make this we’d-better-get-ours-quick mindset—which will increasingly make rational fiscal sense for more and more countries—a threat of catastrophic proportions to the global economy and to every citizen in it.

That is what all the fuss is about.


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A candidate for the Republican nomination for California’s 11th Congressional District, Brad Goehring, is taking some heat for having posted in his Facebook status—yes, we’ve come to that—that if he could, he would issue hunting permits and declare “today opening day for liberals. The season would extend through November 2 and have no limits,” he continued, adding: “we desperately need to ‘thin’ the herd.”

There ensued the by now perfunctory “Are you suggesting violence?” with the implied but unstated as we know you people in the radical right wing agenda are just this close to committing. Whereupon the perfunctory apology, and the claim that, of course, we do not condone violence in any way.

The claim, or worry, that some people on the right are inching closer and closer to unhinged violence has occupied a lot of media attention recently, especially as the Tea Party movements began gathering steam. As others have pointed out, however, the Tea Party rallies have been remarkably civil and peaceful—in contrast, for example, to many of the recent demonstrations sparked by Arizona’s new immigration law.

But this leads me to ask a serious philosophical question: Is there a point at which state encroachment on individual liberty is properly viewed as aggression, thereby justifying defensive force?

I presume there is widespread agreement that defensive force is justified if one is under violent attack from, say, a mugger or rapist. I presume the same holds if one’s family is under attack. Most people would also agree that violent response to someone breaking and entering into one’s home would also license the use of defensive force. Moreover, I presume few would fault communities that are targeted for violence because of their race or ethnicity from organizing and defending themselves, even with violence. Numerous historical examples of all these cases spring readily to mind.

But I am interested in non-violent encroachment on liberty. So put aside for the moment cases like what happened at Waco or what the Columbus, Missouri police department did recently. Can non-violent encroachment on liberty ever rise to the level of aggression that justifies defensive, even violent defensive, action?

Let me offer a concrete scenario. Suppose Sam A. is the head of a household that includes several dependent children. Suppose moreover that Sam A. believes that the fiscal policies of his federal government, including in particular the enormous and rapidly growing public debt, are, unless dramatically reversed, unsustainable and will lead to significantly declining standards of living both for himself and for his children. Suppose Sam A. believes that to address the debt problem, his federal government will dramatically raise taxes and inflate away the value of our wealth, both of which will contribute to substantially declining economic performance. Suppose, further, that he recognize the clear empirical connection between growth in wealth and prosperity, on the one hand, and between declining wealth and misery and suffering on the other.

Now let us connect the dots: By this chain of reasoning Sam A. concludes that the fiscal policies of the federal government pose a clear and growing danger to his prosperity and standard of living, and an even greater danger to that of his children and grandchildren, who will be obligated to spend the majority of their productive years working to pay for government programs and government debt they played no part in creating and from which—he is convinced—they will not benefit. This would be a form of (massive) taxation without representation. And if that justified action before, well, perhaps it might justify it again.

So you see the import of the question I am raising. If one takes seriously one’s obligations to protect and defend one’s family and children, and if one accepts the reasoning I sketch above, it seems one might be led to believing that some government action that is not in itself violent can nevertheless justify defensive, even possibly violent resistance.

Has Sam A. gone wrong in his reasoning? Where? The response that he had the right to vote or agitate (non-violently) against the policies he now abhors, so he can now raise no objection, does not, I think, cut any ice. Suppose he did vote against the policies and suppose he did agitate (non-violently) against them—and they nevertheless proceeded apace. Surely his having been on the losing side of the vote does not entail he must submit to whatever the winning side decides.

Many people in Greece seem ready to engage in violence to protect what they see as threats to their prosperity. I think their thinking is misguided—they have been living at others’ expense, which is an altogether different animal from what our Sam A. is facing—but I wonder whether the principle is plausible (even if misapplied in Greece’s case).

Perhaps, then, violent defensive action can be justified in response to non-violent government action. If so, the next question, of course, is: When?

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This year—and predictably, most years around April 15—a number of stories popped up on the topic of who pays the taxes (or more correctly, given the laziness of the media, the same story reprinted with minor modifications in many different venues).

The take home point: 47 percent of Americans have no income tax liabilities whatsoever.

This gives rise to great concerns about fairness and the perversity of any system in which, within the foreseeable future, a majority of the population not paying taxes will be able to dictate policies and tax rates imposed on the minority that pays taxes.

Taxes should be a source of concern, but not necessarily for the precise reasons cited above. To begin with, the transition from (1) 47 percent of the population pays no income taxes to (2) 47 percent of the population pays no taxes, requires that we assume that there are no taxes other than income taxes. In fact, nearly everyone pays payroll taxes (around 99 percent of the lowest quintile) and sales taxes, and the latter are particularly regressive.

While it may be true that we will soon be a nation in which a majority do not pay income taxes, it will never be the case that the majority will pay no taxes. Indeed, one would expect payroll taxes to increase overtime insofar as they constitute the life blood of the big entitlement programs (social security and Medicare).  This has been the historical trend for the past few decades.

Although the arguments about half the nation not paying taxes is empirically false and overstated, the issue of fairness receives far too little attention.  Here I am not concerned with the percentage of the income tax paid by the top quintile. I will assume if you are smart enough (or lucky enough) to be in the top income quintile, you are smart enough to fend for yourself or rich enough to hire someone to do it for you. Rather, we must focus on the real source of unfairness: the decision to impose high taxes on those yet to be born.

Broadly speaking, there are only two kinds of taxes: those we pay now, and those we force on future generations through the assumption of debt.

Let us consider the past three decades. On the revenue side, receipts averaged 18.3 percent of GDP in the 1980s, 18.5 percent in the 1990s, and 17.6 percent in the past decade. On the spending side, we have gone from an average of 22.2 percent GDP in the 1980s to 20.7 percent in the 1990s, ending at 20 percent for the past decade. The current year is something of an anomaly (one hopes) with spending at 25.4 percent of GDP (all figures drawn from the OMB’s historical tables)

During this same period, gross federal debt has increased from 33.4 percent of GDP (1980) to 69.2 percent of GDP by the end of the George W. Bush presidency, and it is projected to break the 100 percent threshold by 2012 (although it might come sooner). Take this debt and add the costs of covering future unfunded liabilities and you have a sense of the kinds of tax burdens we are passing on to those who have yet to be born. This, my friends, is the true unfairness in the tax system.

Let us stipulate arguendo that people have a right to be stupid. Any survey of public policy will provide evidence that voters and elected officials have exercised this right routinely, regardless of party affiliation or historical epoch. But I refuse to accept the argument that these same folks have a right to pass the bill to future generations without first mounting a rather convincing justification.

The big question: Short of an economic constitution, is there any means to prevent this intergenerational transfer-seeking?

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What kind of adults do we want our children to become? Responsible parents ask themselves this question, and their answers provide principles that guide their parenting. 

The federal government, however, is making it very difficult to be a good parent, because it systematically undermines so many of the lessons one wants to teach. 

I want my children to become respectable, independent adults—able, like the blacksmith in Longfellow’s poem, to look “the whole world in the face,/For he owes not any man.” There is a nobility and a dignity in standing on one’s own two feet, in expecting to be held accountable for what one does with one’s liberty, and in not imposing on others to handle one’s own affairs. 

Now, children are all for liberty, but they sure don’t want accountability. They want the freedom to decide whether to do homework or watch American Idol, but they don’t want privileges taken away if their grades suffer because they opted for the latter. They want the freedom to spend all their money on candy and sodas at the movies, but then they want mom and dad to pay the registration fee for the school trip they were supposed to use that money for. 

If you’re a parent you understand this all too well. How many times have you spoken with your children about the importance of planning ahead? About remembering longer-term goals and arranging priorities accordingly? About how becoming an adult means saving for a rainy day, keeping your promises, and not expecting others to do things for you when you should take responsibility for yourself? 

These things go into making a responsible adult. Liberty, yes, but accountability too; and using good judgment about how to allocate resources so that long-term goals are served, not just the pleasures of the moment. One has to develop the discipline to abide by one’s principles all on one’s own, even when nobody is looking. 

Yet all of these sound moral habits are violated today by the federal government, and with increasing flagrancy. Take just one spectacular example: the mounting national debt. 

The federal government’s national debt is currently over $12 trillion—some $40,000 for every man, woman, and child in America. That’s not including unfunded obligations to Social Security, Medicare, and Medicaid, whose present value is approximately $41 trillion, or another $137,000 per American. For a family of four, this means over $700,000 in total current federal government debt. Our national debt will soon approach, and then exceed, 100% of our Gross National Product

Putting economics aside, consider the moral message this conveys. Nearly every conceivable problem people might face in life constitutes an obligation on someone else’s part to resolve. President Obama’s proposed 2010 budget funds hundreds of government programs designed to reduce or eliminate the negative consequences of people’s own bad decisions—giving them, in essence, liberty without responsibility. Do not fret about standing on your own two feet, it tells Americans: spend recklessly today, for tomorrow we will bail you out. 

Who is the “we” who will bail you out? Well, don’t fret about that either: future Americans may be servants to the debt, but that is years from now, and for now we’ll pretend that by then someone will have figured out how to deal with the problem. 

But why should our children take responsibility for themselves when the adults will not? Why should our children undergo the arduous process of becoming accountable adults when those currently in charge take every opportunity to shirk their own responsibilities, closing their eyes to the economic tsunami that their decisions will unleash on future generations? 

Once upon a time, people like George Washington, Thomas Jefferson, and Adam Smith railed against public debt, believing it an immoral imposition on our children. It is indeed an egregious form of “taxation without representation,” since those who will have to pay it—future citizens—have no opportunity to say no. That alone should awaken us from our moral slumbers: It is wrong to do this to our own children. 

But it is also a terrible moral lesson to teach them. The virtuous adult is free and independent, yet also responsible and accountable. Our public institutions should not only encourage that virtue but also manifest it. Is it too much to ask that our representatives behave as we would have our children behave?

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