Budget Debt
The US Government spends about $3.7T a year and generates revenues of about $2.5T a year. A $1.2T annual deficit in 2012. In the last two years, Sequestration cuts and increased revenues have reduced the deficit. Now that Obamacare is underway, forecasts skyrocket for budget deficits. If anyone wants to know why we have a budget problem in this country, all you have to do is look at the running debt clock. We are now at $17T in debt.! But, if big numbers alone don't get your attention, then lets put the $17T in perspective, it represents over 100% of GDP. The nation owed $10.6 trillion on Jan. 20, 2009, when President Obama was sworn in, and he has added another $5.4 trillion since – more than Bush piled up in two terms. There is bipartisan agreement that we cannot sustain this level of debt. There is also bipartisan agreement that we must correct the outflows exceeding inflows that drives the debt higher every second (see debt clock) . Everyone who manages a checkbook has seen this problem before and knows how to correct it - reduce expenses and increase income. Increasing revenues is critical to the solution, but will not have an immediate impact. Reducing expenses is also critical to the solution and can generate immediate impact. It is the only thing in your control instantly! Everything else we here about this subject beyond these two facts is just noise and should be ignored. The political left and right cannot agree on how to correct this problem. Doing something is also better than doing nothing, which is what this stalemate is giving us now. The left solution to our problem is to increase taxes on the rich to increase income. Currently the top 20% of income earners pays 80% of the federal tax burden. So do we want them to pay 100%? 110%? 120%? Maybe just write the check every year for the entire cost of government, whatever it is? Clearly this is not the solution. The right wants us to reduce spending and taxes, which is also a poor solution in a recessionary economy. But the truth is we must do both (reduce expenses and increase income), we must do it now and it will not be easy. All the political hot air outside these two facts is simply a distraction from the difficult but obvious answer. Europe is going through this right now and they are struggling mightily with the anticipated pain of the solution that in their hearts they know is necessary. To increase income we must immediately restructure the tax code to foster a growing economy. A growing economy will increase income (tax revenues for the government) over the next 10 years, but not immediately, this is a delayed impact. To immediately begin to impact our budget and debt problem whiling anticipating increased revenues we also must immediately and dramatically cut spending. That MUST include discretionary spending AND entitlements which represent 90% of the problem. The left will say you are hurting education, the homeless, healthcare of all Americans, the elderly and on and on. The right will shout "we are already taxed enough". All This whining MUST be ignored. No one wants to hurt themselves, their families or their neighbors We have no choice but to intelligently make these difficult decisions while minimizing the pain. But there will be pain. And our representatives MUST ACT NOW. It is a dereliction of duty if they do not. Below you can watch the ongoing debate on this critical issue. And hopefully see the solution we need develop.

The Election: Making Difficult Choices

11/7/16
By John Mauldin,
from Maudlin Economics,
11/6/16:

Its the economy stupid!

I want to share with you some of the things I’m going to be thinking about as I walk into the polling booth on Tuesday. I certainly understand the passion around many of the issues the candidates are talking about: immigration, income inequality, taxes, defense and overseas wars, Supreme Court nominees, healthcare, Social Security and other entitlements, the environment and regulations, and a host of other things. Call it the economist in me, but the overriding thing on my mind as I walk in to vote will be the future of the economy. Almost all of the issues listed above are dependent on how well our economy does. The economy will dictate whether we can afford to pay the taxes to do all the things we would like to do, whether there are enough jobs for everyone, and whether we’ll have the financial and political wherewithal to deal with the debt and entitlements tsunami that is rushing toward us.

[Let me simplify ...]

We now have $20 trillion of debt on the US books, plus another slightly over $3 trillion of state and local debt. We have an $18 trillion economy, which means that our true debt-to-GDP ratio is about 125%. Of course, there are those who would say that much of that debt is money we owe ourselves, in the form of Social Security and highway trust funds, various pension balances, and so on – as if that means the debt does not have to be paid. Anybody who says it doesn’t is giving you economic bull patties. Social Security is going to have to be paid, whether the money comes from the trust fund or from the actual budget. It is not something we owe to ourselves; it is something we owe to future recipients, no less than we owe our various government debts to pension funds and insurance companies, not to mention the retirement accounts of 100 million people. If you look at our national budget, you see that interest on the debt is about $250 billion for fiscal 2016. The chart below, from the Congressional Budget Office, shows shows those annual interest payments growing to over $800 billion (that is, more than tripling) in less than 10 years.

That interest is net interest, of course, since they take out the actual interest we pay to the various trust funds, net out the debt held by the Federal Reserve that is rebated, and perform other accounting shenanigans. The Treasury Department says the actual net interest paid in October was $23 billion, which suggests that interest costs for fiscal 2017 will be north of $280 billion.

The Treasury Department also shared this interesting factoid on its website: The actual interest expense for 2016 was $432,649,652,901.12 cents. That’s $432 billion and change, so you can see that almost $200 billion was netted out to other organizations. But that, too, is money we are eventually going to have to pay and that is accumulating as debt due in the future. As those trust funds are drawn down because increasing numbers of people are retiring, that debt is going to come due, much of it in the next 10 years

Between Social Security and the various health and pension programs (for government employees, the military, etc.) we have unfunded liabilities of at least $104 trillion. My friends Professor Larry Kotlikoff (of Boston University) and syndicated columnist Scott Burns estimate the unfunded liabilities to be closer to $220 trillion. So just pick an impossibly large number and go with it, as you like.

I will go into this topic in more detail next week, but 43 million of our citizens live in poverty. Fifty-six million are enrolled in Medicare. Almost 43 million of our citizens receive food stamps. We have lost 5 million manufacturing jobs in the last 16 years. Median income is up just 3% in the last 16 years, while the median new home price has almost doubled. Ninety-four million people are not in the workforce, with 15 million of them actually unemployed (though the official number is only 8 million). You get the picture. It’s not pretty. The US debt rose by $1.6 trillion last year, almost $1 trillion more than the budget rose, because of “off balance sheet” debt obligations that somehow mysteriously show up as actual debt on the books but not in the official reporting budget. I would point out that if a public business were to publish its accounting statements in the same manner, the SEC would shut it down, and its management would go to jail. Meanwhile, we just re-elect and reappoint our managers of the US budget. Not quite the same thing…

have used the following graph several times in the last few months, but it is hard for me to do anything without thinking about what will happen during the next recession.

It is quite conceivable that we could be approaching $30 trillion in national debt by the time the president is inaugurated in 2021.

That is not a sustainable model.

The outcome is likely to be economic deprivation for many of our citizens, depression-level unemployment rates, and an economic upheaval that will roil the markets unlike anything we have experienced. It will make 2008 look like a picnic. Because that debt has to be paid in one form or another. If we print it (and that is one of the bad choices), there will be significant consequences. If we choose to increase the proportion of GDP that is taken by taxes, we will slow growth and job creation.

The longer we wait to make those choices, the more difficult they become. Look at the chart below. It shows the amount of money spent in the various departments of government. Entitlements, defense, and interest are the big line items. While cutting some of the other items might help, the only real solution is to deal with defense and entitlement spending and somehow figure out how to bring down the debt and interest expense. Everything else is tinkering at the margins.

So when I walk into that polling booth next Tuesday, I’ll be thinking that we have to make some very difficult choices in the next four years.

Bluntly, we are going to have to raise the amount of money we take from the economy in the form of taxes and we are going to have to reduce the amount of entitlements and welfare that we pay. It is not a choice of either/or. It has to be both/and, and that means compromise – and I just don’t quite see how that happens. My friend Rod Martin (an uber-conservative Republican insider) wrote me a note earlier today with the following thoughtful comment: A vote is not an endorsement. An endorsement is an endorsement. A vote is a choice between two possible outcomes. Refusing to vote is refusing to choose, but it is itself a choice, to be irresponsible without actually avoiding responsibility. I don’t have to like my choices. I frequently don’t, in voting or in other things. I do have to choose the outcome least likely to harm – or at least likely to do the least harm – to those for whom I’m responsible.

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