Wednesday, July 20, 2011
Despite being handed a comprehensive and impartial template just seven months ago, somehow Congress still can't agree on a plan to shrink the deficit.
Last December, the president's bipartisan debt commission (aka, The National Commission on Fiscal Responsibility and Reform) issued a detailed report titled, "The Moment of Truth."
The 10 Democrats and eight Republicans on the 18-member commission called for $2 trillion in spending cuts and $1 trillion in tax increases, plus recommended a series of long term deficit cutting measures that would cumulatively:
• Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.
• Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).
• Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.
• Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.
• Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.
• Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.
In total, these measures would:
Cut hundreds of billions from discretionary spending each year over the next decade; institute comprehensive tax reform that would "sharply reduce rates, broaden the tax base, simplify the tax code and reduce the many 'tax expenditures' — another way of spending through the tax code"; contain Medicare costs through a variety of measures; cut agricultural subsidies; modernize the military and civil service retirement systems; and ensure the long term solvency of the Social Security System.
The plan calls for, "Holding spending in 2012 equal to or lower than spending in 2011, and returning spending to pre- crisis 2008 levels in real terms in 2013." Then "limiting future spending growth to half the projected inflation rate through 2020."
The report firmly states, "Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared."
"One of the Commission’s guiding principles is that everything must be on the table," including both security and non-security spending, the report reads.
All security spending, which constitutes about two-thirds of the discretionary budget, would be on the table — including nuclear weapons, homeland security, veterans, and international affairs.
The remaining third of the discretionary budget, which is dedicated to non-security programs, would also be on the table — including education, housing, law enforcement, research, public health, culture, poverty reduction, and other programs.
The report is loaded with specifics for eliminating inefficient, unproductive spending and for consolidating duplicative federal programs. It also calls for the elimination of all federal earmarks.
Also recommended is the elimination of all income tax expenditures and a simplification of the tax code. Closing hundreds of loopholes would allow cuts in overall tax rates.
Eliminating most deductions "could reduce income tax rates to as low as 8%, 14%, and 23%," said the Commission.
Co-commissioner Erskine Bowles emphasizes that tax expenditures amount to a trillion dollars a year. That's substantial.
The corporate tax code would also be reformed, says the report, with the elimination of all tax expenditures and subsidies.
The Commission goes on to warn that, "Federal health care spending represents our single largest fiscal challenge over the long-run. As the baby boomers retire and overall health care costs continue to grow faster than the economy, federal health spending threatens to balloon."
With that reality in mind, the commission calls for numerous reforms to federal healthcare spending to slow the growth of costs and ensure long term fiscal survival.
In total, the commission's report is quite detailed and full of solutions to some very tough problems. There will be much pain, and it will be spread through much of our society. The Commission calls it "shared sacrifice."
The reality is that there are no painless solutions due to the depth of problems this nation faces.
The glaring fault in the report was the omission of a tax on the financial industry, as recommended by the IMF. Such a tax would have been a much needed source of additional revenues and may have acted as a brake on speculation.
Despite all the specifics, this plan has largely been ignored in Washington as the politicians fight, bicker and cling to their ideological convictions.
Currently, there is even discussion about additional blue-ribbon panels, with more suggestions to be overlooked. It's as if the politicians actually believe that some other commission will give them easy, pain-free solutions to the mess they and their forebears have gotten us into.
For example, the Reid-McConnell plan proposed in the Senate would cut a mere $1.5 trillion in spending over 10 years. That's the size of this year's deficit. The plan would also set up a new congressional panel to explore ways to reduce the debt.
That's just what we don't need; yet another debt commission to ignore — just like the last one.
Friday, July 15, 2011
Even if Congress and the White House reach a deal to raise the debt-ceiling and make large budget cuts, the long-term projections for the U.S. economy simply aren't good.
Unfortunately, whether you look at economic growth, tax revenues or unemployment, the future doesn't look bright.
The Congressional Budget Office (CBO) Website notes the following:
Federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession. However, the growing debt also reflects an imbalance between spending and revenues that predated the recession.
Federal spending has increased not due to pork-barrel projects, but from supporting Americans who have been hit particularly hard by the Great Recession. The spending was for long-term unemployment benefits, food stamps (the SNAP program) and increased applications for disability insurance.
It's hardly a surprise; one-in-seven Americans were living below the poverty line in 2009. Consequently, one-in-seven Americans now receive food stamps.
While recession-related expenditures went up, tax revenues collapsed as unemployment soared. Even before the Great Recession, the government's balance sheet was already in tatters as a result of two rounds of tax cuts (2001 & 2003), two concurrent, unfunded wars and the unfunded Medicare prescription drug law.
It all added up to a very bad recipe.
According to the CBO, the national debt will be 70 percent of GDP by the end of this year and will reach 77 percent of GDP by 2021. In total, the CBO projects $7 trillion in deficits over the next 10 years.
Yes, despite the best intentions of some in Congress, deficits will continue for the next decade.
"To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of the those two approaches,” CBO Director Douglas Elmendorf announced in January.
Simply put, the only meaningful, substantive solution includes cutting spending and raising taxes. There are no other choices. We are now way past that.
Even the most aggressive budget cutting plans still leave the nation with massive deficits over the next decade.
The House-GOP-passed budget would generate deficits for more than a decade into the future, according to the CBO, and add about $9 trillion to the current debt in 10 years.
Yet, that plan was viewed as too draconian by many in Congress (including some Republicans) and by most voters who were polled on the topic. Consider that for a moment; the most far-reaching plan would still result in massive additions to the deficit.
It's important to remember that the U.S. economy is now totally reliant on federal spending and reducing that spending, though vital, will inevitably shrink the economy.
The deficit plans now being discussed in Washington include raising the debt ceiling by $2.4 trillion. That would push the national debt to $16.7 trillion by next year. And, according to CBO projections, that ceiling will have to be continually raised over the next decade.
One of the primary challenges for the government is that high unemployment results in lower tax revenues. And unemployment will remain at high levels for years to come. Millions of jobs have been outsourced and are never coming back. And in a stagnant economy, businesses won't hire.
Economic growth of 2% isn't enough to even keep unemployment constant, much less reduce it. In other words, unemployment will go even higher if growth remains at 2%. As Fed Chairman Ben Bernanke told 60 Minutes, " It takes about two and a half percent growth just to keep unemployment stable. And that's about what we're getting."
However, GDP expanded at just 1.9% in the first quarter. Projections for second quarter growth range from 1.6% (Macroeconomic Advisers) to 2% (Goldman Sachs).
When the economy grows, tax revenues also grow. But when the economy contracts during a recession, tax revenues also contract. And when the economy is stagnant, revenues remain stagnant. However, in the latter two cases, government expenditures typically increase because more people need government assistance of one form or another.
The primary problem for the U.S. has been, and remains, slow economic growth.
The U.S. economy has been slowing for several decades. Economic growth averaged 3.2 percent from 1965 through 2008. However, over the past 20 years, growth averaged just 2.5%.
That decline really isn't surprising.
Over the 20th Century, the U.S. went from a growth era in which it was a post-emerging market with a dominant manufacturing sector, to a mature post-industrial economy. The rate of growth would normally be expected to slow even without a crippling recession.
This pattern is expected to continue well into the future.
According to a recent McKinsey Global Institute study, the economy is likely to remain slow for decades to come.
McKinsey argues that the economy is likely to slow because as labor force participation drops—as more and more baby boomers retire and the number of new women entering the workforce slows—Americans who do work will have to support the increasingly large proportion of Americans who don’t.
Unless the unemployment problem improves, government revenues won't improve. And if government revenues don't improve, annual deficits will continue adding to the nation's already massive debt.
Here's a rather simple formula: No jobs = no spending = no growth = lower tax revenue = higher deficits = higher debt = higher tax rates & interest rates = no growth.
It's a vicious cycle, and the U.S. is caught squarely in the middle of it.
Where it stops, nobody knows.
Wednesday, July 13, 2011
The European debt crisis has finally revealed itself to be about something much bigger than Greece... or Ireland or Portugal.
And the crisis is poised to become epically expensive.
Italy and Spain are the third- and fourth-largest economies in the eurozone, and they are now at the center of the crisis. Bailing them out would far exceed the European Union's rescue funds.
Paradoxically, both nations are too big to fail, yet too big to save. If either nation were to default, the impacts would be absolutely historic and would be felt worldwide.
Italy's debt equals 120 percent of its economic output and is the second biggest in the eurozone, after Greece.
That's the reason for concern.
Spain’s public debt equalled 63.6% of the country’s GDP at the end of the first quarter.
The European Stability and Growth Pact — an accord agreed to by all Eurozone member states — imposes a 60% limit on debt. But that hasn't stopped either nation from plowing itself further into indebtedness.
“Spain and Italy are nearly five times the size of Greece, Portugal and Ireland and carry nearly four times the volume of debt,” says Michael Darda, economist at MKM Partners in Stamford, Connecticut.
In other words, Italy and Spain are the real reasons to worry. Either nation has the potential to blow up the Eurozone and the euro itself.
This has started to worry investors and jack up interest rates on Italian and Spanish debt.
The yield – or interest rate – on Spanish 10-year bonds has hit 6.2 percent. Meanwhile, Italian 10-year bond yields recently eclipsed 6 percent for the first time since 1997. That's a clear warning signal.
According to analysts, the 6 percent rate will present serious challenges for Italy, but 7 percent bond yields would be unsustainable. Greece, Ireland and Portugal all sought international assistance after their 10-year yields rose past 7 percent.
It seems that Italy is now uncomfortably close to the danger zone.
Italy has more than 500 billion euros of bonds maturing in the next three years — about twice the 256 billion euros extended to Greece, Ireland and Portugal in their three-year aid programs. This provides some scale to the magnitude of Italy's debt burden.
Italy’s economy, which has been sluggish for the better part of a decade, is not growing fast enough to cover its massive debt load.
The International Monetary Fund expects Italy's economy to grow 1.3 percent in 2012, a significant increase from this year. Growth was 0.1 percent in the first quarter, a fraction of the 0.8 percent for the euro region.
The problem for all countries with high debt loads is that even as they impose strict austerity measures to shrink and eventually balance their budget deficits, they still have to contend with unyielding and expensive debt costs.
Both Moody's and S&P have issued warnings about Italy's ability to trim its debt. An economy of that size, facing problems of this magnitude, is nothing short of alarming.
Despite all of that, Spain is thought to be the bigger risk at the moment.
If a full-blown debt crisis breaks out in Italy or Spain, the euro union would face disintegration — a cataclysm far beyond anything it has grappled with to date.
Such a crisis would also create a domino effect of imploding banks.
Barclays Capital says European banks have total claims and potential exposures of 998.7 billion euros to Italy, more than six times the 162.4 billion euro exposure they have to Greece.
Think about that; Greece already has the whole world spooked, yet its debts are relatively tiny.
Italy, however, is a big fish. And so is Spain.
European banks have 774 billion euros of exposure to Spain and 534 billion euros of exposure to Ireland.
However, the problem is not just Europe's alone.
U.S. banks are more exposed to Italy than to any other euro zone country, to the tune of 269 billion euros, according to Barclays. American banks’ next biggest exposure is to Spain, with total claims estimated at 179 billion euros.
So, the problems in Italy and Spain will have far reaching consequences and will send shock waves through the global economy.
This is no longer a debt crisis involving lesser countries with small economies; the big fish are now in the fryer.
Friday, July 08, 2011
The hits just keep on coming.
The U.S. was dealt yet another dose of bad economic news today when the Bureau of Labor Statistics announced that a mere 18,000 jobs were added to the American economy in June.
Despite the meager increase in jobs, the unemployment rate still rose to 9.2%. That's because the ranks of the newly unemployed exceeded those of the newly employed.
By now, we've all become accustomed to negative economic data, but this news took even Wall St. by surprise.
The "Street" had projected that between 90,000 and 140,000 jobs would be added in June, still a paltry sum.
But that wasn't the only bad news; the May employment numbers were also revised downward today; only 25,000 jobs were added to the U.S. economy in May — less than half of what was originally projected.
This sort of tepid job growth is really problematic.
Labor experts say a bare minimum of 125,000 jobs must be added each month simply to keep up with population growth. This means that 1.5 million jobs need to be created this year just to employ all of the new high school and college graduates, plus recent immigrants.
However, even if the U.S. were to achieve that kind of growth, it still would not address the roughly 24 million Americans who are already unemployed or under-employed, meaning they can only find part-time work.
To provide some perspective of the hole we're in, consider this: the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. Obviously, that hasn't happened.
In June, the labor force participation rate fell to a 27-year low of 64.1 percent, as more Americans gave up looking for work altogether. An individual has to run up against a wall at every turn to entirely give up looking for work. It's a sign of utter hopelessness.
Largely out of fear of losing their jobs, American workers have become so productive that companies are now doing more with less. That has eliminated any incentive for them to hire.
When so many people are out of work, there is also no incentive for employers to offer wage increases or high starting salaries. Many professionals are now working in jobs for which they are considerably over-qualified. Beggars can't be choosers
The stark reality is that there are 7 million fewer workers today than just four years ago. The number of unemployed Americans has roughly doubled, to more than 14 million.
What's most disturbing is that the government's unemployment figures don't include those who have lost their unemployment benefits, or those who have only part-time jobs but want full-time work.
Economist John Williams of ShadowStats.com (who provides detailed economic reports for U.S. businesses) puts the real unemployment rate at a whopping 22.7%. That's akin to the Great Depression.
The current state if affairs is nothing new; job creation has been in a long-term downturn.
Remarkably, job growth in the last decade was actually negative. While the number of new workers entering the workforce swelled during that period, just 1.7 million new jobs were created.
According to the Bureau of Labor Statistics, just 1.1 million jobs were created last year. That's nearly as many as in the previous decade combined.
The troubles go back many, many years. In fact, job creation has been slowing for decades, and that's a very bad omen.
According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased at about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.
And it's taking longer and longer to recover from each successive recession. The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.
The historical precedents and current trends make it very difficult to feel optimistic about the future.
The long-term projections for younger workers, in particular, do not look good. Many older workers are putting off retirement out of necessity, leaving fewer positions available for younger workers.
The employment statistics for the last three classes of college grads have been, and will continue to be, quite bleak.
All of this has negative consequences for our consumption-based economy, which is 70% reliant on consumer spending. Obviously, there is less consumption when fewer people are working, as there is less disposable income directed back into the economy. It also means lower tax receipts at both the state and federal levels.
If unemployment remains stubbornly high, wages will also remain stagnant. That would create a negative feedback loop of both lower both consumer spending and economic output.
American consumers are already strapped and heavily burdened by debt. Consequently, we will not spend our way out of this malaise.
Our unemployment problem is huge and complex. Millions of lost jobs are never coming back. Consequently, millions of American workers need new skills and new training.
However, the problem is much bigger than creating the 1.5 million jobs necessary to keep up with annual population growth.
Even if the nation had started adding 2.15 million private-sector jobs per year starting in January of 2010, it would have needed to maintain that pace for more than seven consecutive years (7.63 years), or until August 2017, just to eliminate the current jobs deficit.
It's abundantly clear that this isn't going to happen.
The U.S. is faced with a grim new reality of lower economic growth, less consumption, higher unemployment, lower wages, lower government revenues and unwieldy debt levels at the government, corporate and consumer levels.
Our present economic state is truly quite stark. Sadly, for most Americans the future is virtually certain to be less prosperous than the past.
These are hard times indeed. And they are poised to get even tougher.
Tuesday, July 05, 2011
The US health care problem is a fairly complex one with multiple challenges.
First, our healthcare system is highly advanced and technological. That makes makes it inherently expensive.
Second, health insurance is very costly and beyond the reach of the average American.
From 1999-2009, health insurance premiums for families rose 131%, while the general rate of inflation increased 28% over the same period.
As a result, one in seven Americans did not have health coverage in 2009.
However, those people don't go entirely without healthcare; they just don't pay for it much of the time. People with insurance end up subsidizing them through higher premium costs.
Third, the US is the fattest country in history. Fully two-thirds of Americans are overweight or obese. Consequently, the nation is plagued by lifestyle diseases, such as heart disease, strokes, Type II diabetes, high blood pressure and high cholesterol.
Though these diseases (and many cancers) are preventable through lifestyle changes, too many Americans are unwilling to undertake them.
According to the Centers for Disease Control and Prevention (CDC), 50 percent of a person’s health status is a result of personal behavior and choices.
Consequently, it seems self-evident that the incentive to maintain one's own health is both inherent and self-fulfilling. But somehow it isn't.
Insurance giant UnitedHealthcare, the nation's largest health insurance provider, decided to provide the incentive a few years ago.
United makes those who disregard their health pay more for insurance. And it rewards those with positive health profiles by charging them less.
It seems quite reasonable that overweight people, smokers, and those with high cholesterol and high blood pressure should pay more. It's both fair and practical that Americans take more responsibility for their own health.
Here's how the program works: Employers offer a high-deductible insurance plan through UnitedHealth, such as a policy that requires single workers to pay their first $2,500 in annual health costs before insurance kicks in; for families it's $5,000.
Workers who want to lower their annual deductible can volunteer to have blood tests and other evaluations once a year to see if they smoke and if they meet target goals for blood pressure, cholesterol and height/weight ratio.
For each of the four goals they meet, workers would qualify for a $500 credit as individuals or $1,000 as families toward the deductible. If they qualify for all four — and UnitedHealthcare estimates that few will initially meet all four — their annual deductible would fall to $500 for individuals or $1,000 for families.
The key is that the plan is voluntary. People can always choose to not participate and to pay more.
Those who don't meet the health standards can sign up for weight loss and other health management classes through United.
This program makes sense in the same way that a good-driver policy discount makes sense.
Some people may need help, guidance or education. But we all need to take responsibility for ourselves and for our health outcomes as well.
Ultimately, this type of policy only considers the things an individual personally controls.
Rewarding people to take care of themselves may seem counter-intuitive, yet this is the current state of affairs in America.