I know I go on about balanced budgets and massive deficits, but it is because I think they are a real problem. It seems that neither party wants to address the elephant in the room, with the exception of a few individuals. This article by Jeffrey Anderson on the Weekly Standard site emphasizes the point, Mandatory Spending Exceeds all Federal Reveunes for Fiscal Year 2011
That’s right, the mandatory portion (medicare, social security) of the budget exceeds the revenue that the government will collect in 2011. That means that if we cut all discretionary (defense, interstate highways, homeland security) we would still run a deficit. As the article points out, just 4 years ago the Bush administration projected that this would occur in 2057. So much for accurate projections by the government experts.
We need to get serious about cutting spending and reforming entitlements now. Our representatives in Washington are dithering around talking about $60 billion or $100 billion in cuts which are essentially meaningless in light of the magnitude of the problem. In 2011 there is a $20 billion deficit between revenue and mandatory spending. When you add in the $207 billion interest payments the total is a $227 billions deficit before we spend $1 on discretionary spending and we can’t get agreement on a measly $100 billion in cuts. When you add in the discretionary spending the deficit is over $1.5 trillion. When are our representatives going to get serious about this issue. How long will they kick the can down the road?
Because the amount of money is so large, people lose perspective of the scale of the issue. To give you an idea of the scale, please check out this video from 10000 Pennies
I urge you to contact you Senators and Representatives and insist that they vote against another extension of the continuing resolution. Also, insist that they pursue significant budget cuts across the board.
“Social Security tax receipts for the first half of 2010: $346.9 billion; Social Security benefits payments for the same period: $347.3 billion. Before this year, projections have always been that Social Security wouldn’t cross that line into negative cash flow for five years or so. Now it’s a reality. Congress has been spending Social Security’s positive cash flow for years. Now there’s no positive cash flow to spend.”
Michael Tanner of the Cato Institute “the Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs.” In other words, the Trust Fund doesn’t actually have any real money in it.”
I’ve posted a bit on my concerns with our governments unfunded liabilities. Social Security is a disaster in the making unless we undertake some serious reforms. There are claims that the trust fund will keep Social Security solvent until 2037, that is of course if you don’t consider that there is no trust fund and the government will have to tax or borrow the money in order to pay it out.
Personally would like to see Social Security privatized while protecting those too close to retirement to take advantage of reforms. I would settle for some simple changes, such as rasing the retirement age and removing the income limit on contributions. When SSI was created the average life expectancy was about 62 or 63 years. The thought was the people would not draw on their SSI benefits for many years before they died. Now life expectancy exceeds the retirement age by roughly 15 years, which really screws up the actuarial calculations.
Others propose means testing, but I don’t agree with this approach because SSI is supposed to be insurance not welfare. If people pay in to the system for years, they deserve to get their money back. Otherwise we will reward bad behavior and penalize good behavior. An example, let’s say we have two workers who both average $75,000 in income for their lifetime and pay in pay roughly $500,000 (including employers contributions). Let’s say that worker 1 also saves 10% of his income in a 401K and invests wisely and is able to save another $1 million for his retirement. Worker 2 doesn’t contribute much to his 401K or personal savings, uses the cash to buy a Harley and a boat, and ends up with $100,000 in savings at retirement. We then apply means testing and Worker 1 gets nothing and Worker 2 gets nearly his full SSI benefit. Is this fair and reasonable, I think not.
To make matters worse, we have an Adminstration in the White House that this that there is not a problem and we don’t need to do anything about it. The article by Charles Krauthammer sums things up nicely.
Not really! Mr. Moore believes that wealth is a national resource that belongs to all of us. So if you invest your money to start a business, work 80 hours a week for years to make ends meet and eventually become successful enough to be profitable and expand your business, then the wealth you earn is everyone’s. If you don’t use it they way he agrees, I suppose if he had the power, he would confiscate it.
He made this revelation in light of the debt problem. According the Michael we don’t have a debt problem. If the rich would just free up their capital, problem solved! As Mary Katherine Hamm points out in her tongue in cheek video he is very wrong!
I am amazed at the lack of understanding of basic economics demonstrated by Mr. Moore. I hope that many people don’t share his views. Not only is he wrong, but downright scary.
Most people are not aware of a financial crisis which may be even worse than our Federal Government issues with the budget deficit and unfunded liabilities for Social Security and Medicare. The local and state unfunded pension crisis is something that you should care about because it is big and it is coming soon. Many cities pensions are just a few years away from running out of money.
From a the report, The Crisis in Local Government Pensions in the United States by Robert Novy‐Marx, Univ of Rochester and Nberjoshua Rauh, Kellogg School of Management courtesy of the Heritage’s Foundry. full report
Chicago takes first prize in underfunded city pensions, and this in a state that already has such seriously underfunded state employee pension plans that each household in the city already owes $29,000 just for the state plans. The authors estimate that the combined underfunding of the two jurisdictions equals about $71,000 per household.
However, other city pension funds are so underfunded that they could run out of money in the next few years regardless of the amount owed per household. In order, the first 10 to run out of money unless they do some major reforms quickly are as follows:
1. Philadelphia: $9 billion underfunding ($16,700 per household) in 2015 2. Chicago: $45 billion underfunding ($42,000 per household) in 2019 3. Boston: $7.5 billion underfunding ($31,000 per household) in 2019 4. Cincinnati: $4 billion underfunding ($15,700 per household) in 2020 5. St. Paul, MN: $1.4 billion underfunding ($13,700 per household) in 2020 6. Jacksonville, FL: $4 billion underfunding ($13,000 per household) in 2020 7. New York City: $122 billion underfunding ($38,900 per household in 2021 8. Baltimore: $3.7 billion underfunding ($15,400 per household) in 2022 9. Detroit: $6.4 billion underfunding ($18,600 per household) in 2023 10. Fort Worth, TX: $2 billion underfunding ($7,200 per household) in 2023
The paper goes on to report that the total of State and Municipal unfunded liabilities is over $3 trillion. California alone has a $500 billion unfunded liability.
The time has come to reform these pensions. Contributions by public union members must increase. The retirement age to receive a full pension must be raised (with the possible exception of Police and Fire pensions due to the physical demands of these jobs). Pension benefits have to be reduced for younger workers and those who are not immediately dependent upon the benefits.
I suppose we could continue to ignore the problem and assume that the states can punt and ask the Federal government for a bailout. Yes, the Federal government with a $14 trillion debt and near $100 trillion in unfunded liabilities. No, that is not workable and it just shifts the burden. Or we could raise taxes, but given the size of these liabilities the increase would have to be so large that they would depress the economy (I would prefer that we grow the economy in order to increase tax revenues).
Promises have been made that could never be kept in order to garner votes and political contributions. Reality has set in and it is no longer a future problem that we can delay, but a pressing current issue that has to be addressed. The reaction of the Wisconsin public unions, over the proposed increases in pension and health care contributions and limiting collective bargaining to just wages, tells me that this is going to be a long and difficult battle. I hope that the American people arm themselves with the facts and press our political leaders to make the hard choices that are necessary to get ourselves out of this mess.
OK, his stuff is just so good, I have to share another one of 10000Pennies videos from YouTube. This one is about the proposed budget freeze President Obama mentioned in his SOTU speech.
Billions and Trillions are such big numbers, people have no idea of the scale. These visualizations help bring perspective and make it easy to spot rhetorical BS when you hear it. The proposed spending freeze is so trivial as to be meaningless. We need across the board cuts to get out of the mess we are in.
During President Obama’s SOTU speech, he touted investment (read spending/subsidies) in a high speed rail system as a way to jump start our economy and move our country forward in order to be competitive on the world stage. My immediate reaction was that this is not a good time to spend billions of dollars on a new program. I would prefer that we focus on cutting spending, reducing the deficit and balancing the budget. Once the economy is on track and our finances are under control, I still wondered if this would be a good investment.
The geography of the United States is significantly different from other countries that have implemented high speed rail systems. It is far more costly to connect our major population hubs than it is in say France or Japan. It is possible that in limited areas, such as the Northeast, high speed rail may make economic sense. But attempting to connect all of our major population center is not only cost prohibitive, but not economically sustainable.
The attached table shows the km of high speed rail lines currently in place. The total amount of high speed rail lines for all countries, excluding China, is 9,430 km. A single line from Los Angeles to New York would require 4,490 km of track. Approximately half the number of miles for all countries combined just to connect a small percentage of our entire population. Our geography just doesn’t fit the model for a cost effective rail system of travel. And you might ask why I did not include China in the comparison. China does not have a system of roads comparable to our interstate system, so they need rail to build out their basic transportation system. Also, a large majority of Chinese citizens do not have nor can the afford automobiles, so rail it the logical choice of transportation for their country.
If you build it they will come, right? If we have an extensive high speed rail system, people will forgo using their cars or flying in favor of travel by train, correct? Since we like to use European countries as an example for how we should operate in the United States, let’s look at the percentage of travel associated with rail travel there. In a study done by the Amtrak inspector general, six European countries (UK, Germany, France, Spain, Denmark and Austria) spend over $42 billion per year in railroad subsidies and yet the usage was 7.9 % of all surface transportation (which excludes boat and air). Of course the $42 billion does not include the cost of building the systems, only the yearly shortfall between revenue and operating expenses, sounds like a great deal! The point, even with the great system they have in Europe, when people travel they prefer cars not trains. If European countries which cannot get their usage above 8%, it seems to me that it is a fallacy to think that we will do better in the US, particularly with our love affair for the automobile and desire for independence. Also, it is clear that even in Europe that high speed rail is a losing economic proposition. In the same time-frame as the Amtrak study, the United States spent roughly $55 billion for all forms of transportation, most of which was covered by user fees. Clearly rail travel in general and high speed rail in particular are not an economically feasible alternative.
So unless I’m really missing something, why would the our government propose such an extensive high speed rail system. I believe that the it is one of the basic responsibilities of the federal government to provider for roads and transportation, so I am not opposed to this idea on constitutional or free market grounds. I’m just curious about the “motivation” behind this system. I think there are two clear reasons; appeasing the climate change proponents and providing graft to labor unions.
The climate change proponents will cheer this proposal because they believe that it will reduce carbon emissions. The theory is that people will stop driving cars and use high speed rail, which is admittedly a far cleaner technology. Of course, I don’t think this will happen, for the reasons discussed above. The second reason is far more likely the prime motivator. The jobs created by building this system will most certainly go to Organized Labor, further payoff for the unions support of Democrats and President Obama. Once the system is up and running, labor unions will also run the system. So it seems that once again, it is not about moving the country forward, but instead, consolidating power and adding voters to the base.
I can’t help being so cynical. In all of the reading I did for researching this project, the proponents of a high speed rail system did not offer any facts or financial analysis, only rhetoric and marketing speak. I would take this effort more seriously and less cynically if I were presented with a real cost and revenue model. The taxpayers deserve nothing less before we embark on this journey.
I’m not interested in arguing about who got us into this mess. The fact is we are on an unsustainable trajectory. We have to do something about our debt and deficit because if we continue on our current course we will be unable to borrow money or worse yet we will be unable to meet our obligations.
Many will say that we need to increase taxes, specifically on the wealthy. The argument is that we need to increase the revenue to offset spending increases. This is a very logical argument taken in the abstract, just a simple mathematical calculation. Increasing the incoming revenue while holding spending steady should result in a decrease in the deficit. However we are not dealing in the abstract. We have empirical information available to examine and based on that information we can predict what is likely to happen if we raised taxes and increased revenues. I will set aside the supply side argument that raising taxes will decrease revenue and assume for discussion sake that revenues will actually increase.
What we know about our Federal government is that is has an insatiable appetite. Our government never decreases in size, it only grows larger and larger. I have no doubt that if every citizen contributed every single dollar they earned to the government that it would spend it all and still run a deficit. This is the problem with raising taxes, spending will not be held steady, it will grow as it always has. How often have we heard cries about how one party wants to ‘slash’ funding to a program only to learn that in fact the actual ‘slashing’ was only a decrease in the planned increase for the fiscal year. Rarely do we see a zero increase let alone an actual decrease in funding to a program. For this reason, I am opposed to tax increases.
That leaves us with the other alternative for addressing the deficit problem, cutting spending. Many will argue that this can’t be done because our politicians primary objective is to get re-elected and none of them want to touch entitlements. I think there is a simple solution to this problem. Cut everything across the board (including defense) by whatever amount is necessary to balance the budget. It will be painful and everyone will feel the pain. This approach eliminates the discussion about what is fair and what isn’t. We also need to address medicare and social security, but that is an issue for another post.