U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012.

U.S. Debt & Deficits:A Budgetary Crisis

Dr. Dennis Foster 8/22/2012

Part I. The Problem.

Debt:Debt:

DeficitsDeficits::

Part I. The Problem.

Context? As % of Context? As % of GDP.GDP.

Part I. The Problem.

Part I. The Problem.

The good news is that the

people who are really going to be mad about this have not

even been born yet.

Part I. The Problem. Unfunded

federal “liabilities”

= $60+trillion

Ever hear of business Ever hear of business cycles?cycles?

Part I. The Problem.

Part II. What is to be done?

• The “fiscal cliff” scenario– Bush tax cuts expire– Expand AMT– Reduce Medicare reimbursements– Sequestration spending cuts– Expiration of some unemployment compesation– Some “Obamacare” taxes kick in

– Net effect … ~$600 billion decrease in deficit.

– … and decrease growth 0.5%. Another recession?

Part II. What is to be done?

• Simpson-Bowles– Spending cuts ($200 b/year)– Tax increases ($100 b/year)– “Public option” in Obamacare to costs– Reduce entitlements

• farm subsidies, student loans

– Rearrange Social Security• raise taxes, raise retirement age

– Expect debt cut by $4 T. over 10 years– … means the debt will grow by $6+/- trillion!

Part II. What is to be done?

• Ryan Budget– Target spending to 20% of GDP.

• details on cuts …

– Target taxes at 19% of GDP.– Retool Medicare as central feature

– CBO figures budget balanced in 2030 (!)– … debt grows until then, but shrinks as

%GDP– … assuming no recessions for next 18

years.

Part II. What is to be done?

• Bush - Privatize Social Security

• Gramm-Rudman-Hollings

• Grace Commission

• Obama - 2011 SOTU

Part II. What is to be done?

• What does the budget look like?

Part II. What is to be done?

• Where does the money come from?

Part III. Why little/nothing will get done.

Lessons from Public Choice Theory

• The study of collective choice using standard economic assumptions - people are rational and self-interested; incentives matter.– Politicians want to win elections.– To win, you must cater to various voter blocs.– To be successful, you must trade votes.

• legal vs. illegal bribes

– To minimize opposition, separate spending and tax decisions.

– Concentrate benefits; spread costs.• exception - tax the rich (rhetorically)

– Rhetoric is important.– Embrace the long run, but promote the short run.– The knowledge problem made manifest.

Part III. Why little/nothing will get done.

Part III. Why little/nothing will get done. Lessons from Public Choice

Theory• What should we expect from the budget “crisis?”

– Politicians will claim disaster looms, or not.– Politicians will choose to do as little as possible.

• even if events catch up with their choices; Greece …

– Politicians will claim to have solved problems, when they haven’t.

• What will happen?– A “sustainable” path will be found; it won’t be.– At the next recession, the magnitudes will be much

worse.– more “European-like”

– This may/may not follow a serious inflation problem.– At the time of crisis, we will have to accept pain.

Part IV. Thinking outside the box.

The 19% SolutionThe 19% Solution

A Balanced Budget AmendmentA Balanced Budget Amendment

Part IV. Thinking outside the box.

Ron Paul - Would you opt out?

• Pay some low rate . . . 10%• Take no government (fed’l) assistance.

Gary Johnson - Balance now.

• Cut subsidies & earmarks.• Reform entitlements.

• block grants

Part IV. Thinking outside the box.

Rethink the role of government

• Recognize that government is crude, incapable,inefficient, wasteful, corrupt, immoral, unjust.

• Adopt the notion that government should be as small as possible and as decentralized as possible.

• Allow people to solve their problems voluntarily in an environment of property rights.

• Embrace the free market as a mechanism that promotes diversity, mutual respect, individuality, and as the ultimate expression of democratic values.

Part V. In the long run …

http://www.usdebtclock.org/ [8/16/2012]

Sources• U.S. Treasury data on debt:

http://www.treasurydirect.gov/NP/BPDLogin?application=np

• St. Louis Fed FRED data base:http://research.stlouisfed.org/fred2/

• Public versus Gross debt:http://en.wikipedia.org/wiki/United_States_public_debthttp://en.wikipedia.org/wiki/File:Holders_of_the_National_Debt_of_the_United_States.gif

http://www.treasurydirect.gov/NP/BPDLogin?application=nphttp://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2011:02:19-gross_vs_net_government_debt_--_a_tedious_topic_with_important_practical_consequences

• Components of government budget:http://useconomy.about.com/od/fiscalpolicy/tp/US_Federal_Budget.htmhttp://en.wikipedia.org/wiki/United_States_federal_budget

• Gross Domestic Product information and data:http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

• Debt data:http://www.fms.treas.gov/finrep11/citizenguide/fr_citizen_guide.html

• Debt and deficits as a percent of GDP:http://www.npr.org/templates/story/story.php?storyId=112339032

Sources• The “fiscal cliff:”

http://www.convergentwealth.com/dollars-and-sense/shadow-fiscal-cliffhttp://en.wikipedia.org/wiki/United_States_federal_budget

• Simpson-Bowles:http://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform

http://www.bloomberg.com/news/2012-06-14/in-praise-still-and-again-of-simpson-bowles.html

• Ryan budget:http://en.wikipedia.org/wiki/The_Path_to_Prosperityhttp://blogs.wsj.com/washwire/2012/08/11/what-is-the-ryan-budget/

• Debate on Social Security:http://en.wikipedia.org/wiki/Social_Security_debate_in_the_United_Stateshttp://www.npr.org/templates/story/story.php?storyId=4164384

• Grace Commission on government waste:http://en.wikipedia.org/wiki/The_Grace_Commissionhttp://www.nationalaffairs.com/doclib/20060406_issue_078_article_5.pdf

• Senate Republicans’ Balanced Budget Amendment:http://cnsnews.com/news/article/senate-gop-unites-behind-strong-balanced-budget-amendment

• The CAP Act:http://www.corker.senate.gov/public/index.cfm?p=the-cap-act

Sources• Gary Johnson on the debt and deficits:

http://www.garyjohnson2012.com/issues/spending-and-the-deficit

• The 19% solution:http://reason.com/archives/2011/02/14/the-19-percent-solution

• Gramm-Rudman-Hollings:http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Hollings_Balanced_Budget_Act

• John Stossel interviews Ron Paul on his “opt out” idea:http://www.youtube.com/watch?v=ZgIY4IxBSXM

U.S. Debt & Deficits:A Budgetary Crisis

Dr. Dennis Foster 8/22/2012