GOVERNMENT DEBT: Termites in the House

Financial Sense Online ^ | June 30, 2006 | Bud Conrad

[remember]

The graph you have shown for government projected debt does not include the government's largest liabilities, Social Security and Medicare.

It doesn't include all future liabilities but it does include Social Security and Medicare liabilities through 2080. In fact, one useful thing about long-run budget projections is that it is harder to hide such liabilities. As I'm sure you know, the government is currently borrowing the Social Security surplus and this serves to make the deficit and publicly-held debt look smaller. However, Social Security is projected to stop running surpluses in 2018 (excluding interest) and to have cashed in all of its government bonds by 2040. Medicare stopped running surpluses just this year and is projected to have cashed in all of its bonds by 2018. Hence, the government will no longer be able to borrow Social Security's surpluses to mask the deficit after 2018 and the publicly-held debt will be very nearly equal to the gross federal debt (the one that's now over $8 trillion) by 2040. In any case, the following graph shows projected federal outlays through 2080:

As before, the actual numbers and sources are at http://home.att.net/~rdavis2/pro2007.html. Also, at that URL is a comparison of all of the long-run projections since Clinton's last budget. As bad as the current projections are, they've greatly improved over the last couple of budgets. The way in which they've improved makes me suspect that they may now be overly optimistic. I'll copy below one of the points from that URL that describes this improvement:

12) The deficit projected for 2080 rose sharply from 11.7% of GDP in the 2001 Budget to 33.5% of GDP in the 2004 Budget and dropped sharply to 13.7% of GDP in the 2007 Budget. The following table shows the makeup of the 21.8% of GDP increase from 2001 to 2004 and the 19.8% of GDP drop from 2004 to 2007:

COMPONENTS OF CHANGE IN DEFICIT PROJECTED FOR 2080

Component of change   2001-04  2004-07
--------------------- -------  -------
Receipts.............   -0.7      3.1
Discretionary Outlays   -3.2      0.4
Mandatory Outlays....    0.3      1.8
Net Interest.........  -18.1     14.5
---------------------  -----     ----
Deficit change.......  -21.7     19.8

As can be seen, the largest component of the rise and fall in the projected deficit is Net Interest. This shows how a relatively small difference in annual receipts or outlays can cause a much larger difference in net interest. This is because net interest is based on the debt which is the accumulation of all past deficits.

Points 13 and 10 on that page go on to look at the change in Receipts and Mandatory Outlays, the next two largest components in the recent fall of the projected deficit.

You made the comment: "There are currently no proposals to use that household net worth to service the federal debt."

The use of the words "no proposals" is a bit misleading. Governments generate no income; taxpayers inevitably pay all liabilities of government , if those liabilities actually get paid rather than defaulted. The absence of a plan or a specific proposal of how or when does not negate the realities that are going to be dealt with by payment, default or a compromise that involves both.

I agree. The cost of the debt will have to be addressed one way or another. My point was that the lack of a proposal to address it will make doing so that much more difficult.

[remember]

In any case, bringing up household net worth when discussing government debt is a little like mentioning your rich neighbor when discussing your own debt.

Household net worth was brought up because of HopefulPatriot's following gem:

The middle class is systematically being destroyed in this country as well. The people don't go broke overnight or even over a generation or two. They just get gradually ground down until everybody is equally poor if not impoverished and they live a subsistence standard of living.

Thanks for clarifying that.

[HopefulPatriot]

I do not see the data from the Gokhale-Smetters Report reflected in your chart. If correct, your chart is similar to the accounting that turned a giant (Enron) into a dinosaur. Here are the words of the acknowledged father of the Constitution, James Madison, "Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide."

The first nail in the US coffin was driven by the Federal Reserve Act. Here is what Thomas Jefferson had to say, "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

When I look at the Gokhale-Smetters Report, what I believe to be true (it has held for 25 centuries) about democracies when the public learns to vote itself benefits, and the warnings of the Founders, it should make anybody wonder how the United States is going to be the exception to the rule. History repeats because people always believe that it's different this time.

[remember]

I do not see the data from the Gokhale-Smetters Report reflected in your chart. If correct, your chart is similar to the accounting that turned a giant (Enron) into a dinosaur. Here are the words of the acknowledged father of the Constitution, James Madison, "Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide."

The main problem is that the Gokhale-Smetters Report and the long-run projections (which came from the most recent U.S. Budget) measure different things. As I understand it, the Gokhale-Smetters Report measures the present value of government's total fiscal imbalance, that is, its total future unfunded liability in current dollars. The budget's long-run projections, on the other hand, just project federal revenues, outlays, and the resulting deficit and debt through 2080.

I do think that it's important to estimate the government's entire fiscal imbalance as the Gokhale-Smetters Report does. It gives us an idea of the total future problem that we face if we don't change policies. However, the whole concept of "present value" is lost on many people and many frankly are not overly concerned about what happens in the infinite future. For that reason, I think it's also useful to look at the long-run projections. They give an idea of how soon the fiscal pressures will hit over the next 75 years and how big they will be (although, as I said, I suspect they may be overly optimistic). Hence, I think it's useful to look at the Gokhale-Smetters Report AND long-run projections, just so long as it is remembered what each measures.

By the way, James Madison is known as the "father of the Constitution" but I believe that quote came from John Quincy Adams.

The first nail in the US coffin was driven by the Federal Reserve Act. Here is what Thomas Jefferson had to say, "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of th eir property until their children will wake up homeless on the continent their fathers conquered."

When I look at the Gokhale-Smetters Report, what I believe to be true (it has held for 25 centuries) about democracies when the public learns to vote itself benefits, and the warnings of the Founders, it should make anybody wonder how the United States is going to be the exception to the rule. History repeats because people always believe that it's different this time.

I agree that far too many people seem to think that the U.S. is exempt from the rules of economics. I suspect that this was likewise the general belief in every superpower that preceded us. Unfortunately, it often seems to take a crisis to get the government and the electorate to respond. Hopefully, any such crisis will be small enough and occur early enough to allow us to respond effectively.