This set of facts could be the death of a prosperous and competitive America unless we start acting to avert disaster right now.  Next week, we’ll talk about solutions.  But we’ll start today by outlining some of the reasons for this apocalyptic prognostication regarding Social Security and the history that got us where we are today.

First, our public pension program is statistically bankrupt and therefore reduces the national confidence and power necessary to remain the world’s economic and political leader. Current deficits retard our recovery from recession as the rules keep changing and businesses cautiously await clarity before increasing hiring and investing.  But today’s problems pale in comparison to what will happen in the future unless we reform Social Security.  Benefits began to be paid out as soon as the program began — that is, before contributions could be saved to fund them.  The system accordingly quickly became a “pay as you go” affair. Benefits have also been raised and widened throughout the years.  The result is a “defined benefits” retirement program that, until recently, has redefined benefits only in an upward direction and is financed off the backs of current workers. Individual benefits have precious little connection to individual contributions.

Aggravating the problem are demographics.  In 1945, there were 50 workers for every one retiree on Social Security.  In 1950, the ratio had fallen to 17.  In ten years, it fell to 8.6, and by 2025, it is expect to drop to 2.27, with a further decline to 2.1 in 2031.   Even with “full” employment, senior boomers are going to be supported by a smaller and smaller relative work force.  Something has to change.

But that something should not be raising payroll taxes again. These taxes already put us at a competitive disadvantage internationally and make it harder to reduce unemployment domestically through job creation. Raising the rates again is not a good solution for future insolvency because doing so increases the cost of labor even more without concomitant improvements in productivity.  What it really raises is unemployment.  Perhaps it takes a sustained global recession with many nations trying to solve their unemployment problems by enhancing exports to highlight these unintended consequences.  No crisis should fail to be exploited.  Let’s just hope this one doesn’t accelerate into an international trade war with battling currencies as well as quotas and tariffs.

Additionally, in all the years when revenues exceeded benefits, our government didn’t save Social Security surpluses for a future that could well be predicted to need them for boomer retirement years.  Rather, it spent these extra billions of dollars, using noxious payroll taxes to fund other government programs.  Social Security supported $99 billion of other government spending in 2009.    What did it get in exchange?  “Special issues” from the US Treasury, with both principle and interest backed thereby.  Safe?  Not necessarily, at least for individuals who have already contributed through payroll taxes and rightly should own their own shares of retirement “savings”.   The rules of eligibility and tax bases are already changing. At least the average annual interest return in 2009 was 4.860%.  That would be a nice return on private savings.  And those savings could have been secured in private nest eggs.  Many Congressional Democrats consider “privatizing social security” criminal.  That’s what we should instead call  keeping forced savings “public” and then spending them on other programs.

Social Security probably had to be run in the red at first.  After all, it was created during the Great Depression in response to the severe and unexpected suffering of seniors who’d already retired from work and lost most of their carefully built-up nest eggs because of Black Tuesday’s 12% drop in the stock market and continued declines for more than a decade thereafter.  It’s not as if retirees could rejoin the work force in response to destroyed savings:  unemployment rates were as high as 25% and didn’t fall below 14.3% until 1941.  Actual unemployment was probably even worse – much worse.  The elderly, if not yet disabled, were likely to be in that invisible pile, “discouraged workers”, who didn’t make it into the unemployment statistics because they’d given up trying to find jobs – any jobs. And we think today’s bad…

While we can approve of — and even applaud — running Social Security in the red during its early years, in no way can we honestly justify plundering Social Security surpluses to finance other government programs in later years.  With all their equity and efficiency issues (see an earlier centermovement.org post), payroll taxes are an acceptable source of revenue if and only if it’s appropriate to force individuals in the work force to save a significant percentage of their earnings for a future when they’re too old to work.  Is this kind of mandate appropriate?  Is it even Constitutional?  State challenges to Obamacare’s requirement that all individuals carry health insurance make one wonder.

In any event, the irony here is that our government forced working individuals to save, and then spent rather than saved their savings.  Until recently, economists have bemoaned how low the national rate of saving has been. More saving typically means more investment, which raises productivity and therefore growth and general prosperity.  National savings are likely as a whole to have actually decreased under this opaque system of  Social Security funds and their raidability.  It’s likely that voluntary participation in company pension plans and  contributions to 401(k)’s declined with forced participation in Social Security.

Sunk costs are sunk; the past is past – although it does inform the present.  The questions we should now be asking are how to reform Social Security or eliminate it as a public program altogether.   Perhaps there’s a better way to prevent poverty in old age.  Regardless of what the changes will be, it’s also important to figure out how to make the transitions from old to new as smoothly and equitably as possible.

One fact we should already know: the sooner the rule changes are announced and the more gradually they occur, the better off for all concerned.  We’re then given time to adjust to the new framework with whatever variables we control and decisions we can make.

Three lessons we must learn from Social Security’s history so far and keep in mind before architecting improvements.  First, perfection is beyond our reach – and even our definition. Wishing so won’t make it so. Second, the law of unintended consequences is fierce and ubiquitous.   How will behaviors change as we alter the rules of the game?  Will they offset or advance our objectives? And third, it’s not enough to have a problem in the private sector to justify involving the government.   At least Social Security has taught us this: we must first try to insure that the government has the resources, incentives and information to ameliorate the situation.

Unless we learn these lessons and have the political and personal courage to fix Social Security, and fix it soon, our whole society will join seniors in facing profound insecurity on all levels – including national defense.   A broke and broken nation cannot successfully defend itself.  And Social Security is just a baby of a problem compared to Medicare and Medicaid.  We need to cut our bipartisan teeth fixing the Social Security mess before we can address these pressing health-care problems with an American First attitude.  All sorts of issues will come to a head with upcoming debt-limit debates and decisions.  Unless this ceiling is raised, the government is likely to run out of funds by March 31.  One thing’s for sure: our government can no longer avoid tough decisions about spending cuts or tax increases by raiding Social Security surpluses.  Why?  Because the surpluses are vanishing.  There will soon be nothing left to raid.  Rather, the debt ceiling will be raised yet again, this time in part so that seniors can continue to receive their monthly checks.

Next week’s post will outline some of the ways to make Social Security secure.  They’ll range from the modest to the extreme.  Please come back, read the piece, and add your own thoughts and suggestions.  We need all the help we can get.

The results from recalculation aren’t pretty.  Faced with the strong likelihood of yet another doc fix, the CBO announced last Friday that the subsequent increase in costs would be $208 billion over the next ten years. That’s a lot to pay for. Reality tends to be expensive. It would also push the new health-care program $59 billion in the red.

In the calculations that made the health-care bill seem like one that not only expanded access to medical treatment but also shrank deficits, the CBO was required to act as if it believed that, after seven years of nixing annual cuts in payments for doctors taking care of Medicare patients, Congress would now approve reducing their remuneration by 21% — the cumulative total of not only 2010’s scheduled reduction but also all those cuts postponed in prior years.  A reduction of more than one-fifth after seven years of nothing?  Whom were we kidding?  Ourselves, for starters.

Did anyone inside or outside the CBO really believe that we could, and would, drastically reduce physician pay at a time when more and more of their services are needed as the population of Medicare patients continues to soar with aging baby boomers? The forces of supply and demand cannot be overturned like this. Shouldn’t we be as outraged about the CBO misleading and mistaken rating as we have been by the blunders of private agencies that so foolishly gave stocks, bonds, and mortgages favorable risk ratings when their futures turned out to be anything but?

Financial corporations appear to have encouraged their employees to give strong ratings to the stocks and bonds of companies who generated millions in business fees.  Our government appears to have encouraged its employees to assign good numbers to fiscally irresponsible program expansion.  What’s the difference?

What role has President Obama played in all this? “Now, I realize,” he said Saturday, “that simply kicking these cuts down the road another year is not a long-term solution to this problem. I’m absolutely willing to take the difficult steps necessary to lower the cost of Medicare and put our budget on a more fiscally sustainable path. But I’m not willing to do that by punishing hard-working physicians or the millions of Americans who count on Medicare. That’s just wrong. And that’s why in the short-term, Congress must act to prevent this pay cut to doctors.”

Obama’s right about the short term. “[P]unishing hard-working physicians or the millions of Americans who count on Medicare” is indeed  “just wrong”. Including these cuts in the budget was accordingly “just wrong” as well.  Why, then, were they ever part of the health-care bill the majority passed?  Will there be consequences for those culpable?

What are we supposed to do in the long term?  The only ways to get more doctors without raising medical fees are to reduce admission standards for medical schools, subsidize their education, or engage in tort reform to lower malpractice-insurance premiums.  The first is scary, the second is costly, and the third requires more political guts than politicians in general and Democrats in particular can muster. So, Mr. President, what ‘difficult steps’ are you going to propose and support?

Based on several additional and equally shady assumptions, the CBO said that the health-care reform bill passed by the Senate would not just be fiscally sound, it would actually operate in the black and help solve our deficit and debt problems. This endorsement gave elected officials political cover, and the bill became law with ease that would otherwise have been surprising earlier this year.  Now the bill has been scored a budget buster in even its first decade of operation. So much for deficit reduction, now, over the next decade, or at any time in the future.

None of the long-term and more discouraging budget figures is official, however, because the CBO is not allowed to project beyond the first ten years to a future when not just program revenues but program services and their expenses will be in full force.  (It apparently will take four years for benefits to be up and running, well after new taxes are imposed to pay for them.)

Another dubious assumption involves balancing the federal budget by fobbing off some of its Medicare’s expenses to the states. The maneuver was never real budgetary relief for the country as a whole, but this little detail may become irrelevant.  Obama is back-peddling and now talks about giving states and even localities addition money to help cope with their additional costs.

And then there are the much-touted savings from reducing waste, fraud and abuse in Medicare.  We should question why such savings would be part of the health-care bill instead of something the government should pursue on its own merit and without the necessity of a new bill to inspire them. Medicare, after all, is statistically bankrupt – big time.

We should also question the ability to cut the nasty triplets in Medicare at all – substantial percentages of these totals are probably really the high cost of information and paperwork for bureaucracy, as well as political paybacks and income redistribution.  Last Tuesday, however, our President raised the sums involved in this form of cost saving when he announced a new initiative to reduce waste, fraud and abuse in the Medicare program 50% by the end of 2012.  “I want to send a notice to all who would swindle and steal from seniors and the Medicare system,” he said. “We are going to find you, we will prosecute you, and we will ultimately prevent those crimes from happening ever again.” Is this his response to Republican demands for financing the doc fix?  It’s not enough.  It’s not even 10% of the requisite payment demanded by Republicans.

But it’s still good news that the Department of Health and Human Services (HHS) and the Department of Justice have jointly recovered $2.5 billion of waste and fraud in 2009.  This sounds promising – although we don’t know how much the recovery cost.  One might even think the two government agencies are on course to reach Obama’s goal of savings up to $18 billion of misuse and crime in 2012.  Alas, HHS is also responsible for incorrect payments of about $35 billion in Medicare’s fee-for-service program.  This is 12.4% of the total.  Will HHS be prosecuted for these mistakes?  Will it have to pay for them?  Alas, the money comes from us taxpayers.  We pay.

If the CBO must continue to operate under the constraint of accepting assumptions as unrealistic as those discussed above, it should also be empowered to grade them.  Transparency is a good thing. The CBO should be obliged to footnote various figures, noting the assumptions that lie behind them.  Perhaps it ought also to provide alternative figures, ones based on assumptions with higher probabilities of actually happening.  It should be obliged as well to note that the first ten years of a program may not well represent the next ten and beyond.

Americans are properly outraged about the poor jobs private-sector professionals have done in rating financial assets like stocks, bonds and mortgages.  Many of the pros were ill informed.  Perhaps they also lacked skill. Others had good information but bad incentives – they worked for corporations who wanted to keep themselves and the firms with whom they did big business happy with rosy prognostications of rising stocks and safe bonds.  Still others were open to bribes, probably the most infamous incidence of which was Jack Grubman’s upgrading AT&T stock from a “hold” to a “strong buy” in exchange for getting his twins into 92^nd St. Y pre-school.

The financial reform bills that passed the House and  Senate  have yet to be reconciled, but both include regulation of private credit-rating agencies.  Standard & Poors, Moody’s and Fitch are all considered at fault for giving investment-grade ratings to mortgage-backed securities that proved worthless or close thereto. The Senate wants to eliminate the freedom of those who issue securities from choosing the agency that will rate them the highest.  The House wants all the rating agencies to register with the Securities and Exchange Commission and to face stiffer standards for liability.

Americans should also be outraged about the poor job the government-sector CBO has been doing in rating the fiscal consequences of Senate and House bills.  In this case, the problem may not be due to lack of preparation or proper skills.  Nor may it be the result of poor incentives or bribes. But the consequences are equally damaging, and they affect all of us. We deserve better information, we need it, and we must demand it.  Minimally, we deserve transparency.  We must be able to evaluate the assumptions that underlie the figures and their specious precision. When and how will accountability be imposed on the CBO?

Good regulation is far more difficult than it may seem.  For the private sector, Wharton Finance Professor Marshall E. Blume properly identifies the real issue: “How do you regulate what we don’t yet know is going to happen?”  For the government sector, the real issue is this: “How do you regulate the regulators?”  Finding the right answers to these questions may be the only way to fix the financial health of our nation.

One Congressman, Paul Ryan (R-WI), who is the ranking Republican member of the House Budget Committee, has offered a detailed plan designed to put the United States on a fiscally sustainable path.  In so doing, he has drawn a big fat political bull’s eye on his own back, daring the Democrats to attack his ideas, which they and their allies have done with glee.  But without a plan of their own, Democrats should keep their mouths shut.  For courage alone, Ryan and his ideas deserve respectful consideration.

Congressman Ryan, in his “Road Map for America,” proposes nothing less than a radical transformation for the delivery of most government services.  Under Ryan’s plan, Medicare, Medicaid, and Social Security would dramatically change as would the way many Americans buy health insurance.  Ryan would also fundamentally reform corporate taxation by replacing corporate income taxes with corporate consumption taxes.   Ryan invites his fellow citizens to dig as deep they want into the details at his website.  The scope of what Ryan proposes is vast, so here is only a taste of his ideas.

For Social Security reform, Ryan refloats the long-held Republican position that workers should be able to put away or invest a portion of their payroll taxes for their own retirement.  Democrats love to demagogue this idea by accusing their opponents of wanting to “privatize” Social Security, as if the Social Security safety net would necessarily disappear under such a proposal.  Among other safeguards, Ryan would have the federal government guarantee a return equal to the rate of inflation. Opponents would like to categorize such “privatization” as radical, but it’s not. Over thirty countries from around the world allow workers to invest at least a portion of money they would otherwise pay in payroll taxes in private but regulated retirement accounts .   In Ryan’s plan, future Social Security benefits are cut for workers who are 55 or younger in 2011, but beginning in 2012 they will be entitled to invest some of their payroll taxes, which would almost certainly guarantee them much more money at retirement than under the current system.

Democrats, bashing Ryan’s plan like a piñata, claim that he wants to “abolish” Medicare and Medicaid.  While technically somewhat true, Ryan does not propose to leave the old and impoverished without healthcare insurance, out to forage in hospital dumpsters for discarded medical supplies, or to shout medical questions at passing doctors.  Rather, Ryan proposes to move to a model similar to the one offered by Democrat Ron Wyden, author of an innovative universal healthcare proposal that President Obama pretended did not exist during the course of this past year’s healthcare debate.  Under Ryan’s plan, all Americans are encouraged to buy their own insurance, with generous tax credits and vouchers for those who cannot afford insurance on their own.  Medicaid patients might have high deductible  plans with their health savings accounts (HSAs) funded by the government. The long-term care portion of Medicaid would remain intact.  Instead of Medicare, an elderly person would get, on average, $11,000 per year to buy insurance, a sum indexed annually to an inflation rate the falls between the overall rate of inflation and the current rate in healthcare cost increase. It is fair to question whether Ryan is offering  a big enough subsidy, or if his revenue assumption are too generous to balance the budget.   These are reasonable questions that Ryan would probably be happy to debate, but more often his ideas are pummeled by politically motivated cheap shots.  Those who attack Ryan should answer some questions of their own:

1)      How are we going to get our spending and debt under control?

2)      What are the most efficient means to provide the services we all want and need?

In the areas of medical-services delivery and social security, Ryan proposes consumer-centered  and market-driven models, as opposed to the big-government model we currently rely on but is going broke.  In everything we buy as consumers – from vegetables, to home electronics, to auto insurance – we rely on a market to deliver the best combination of quality and price.  Does medical insurance really have to be that different?  And no  individuals in their right minds would prefer to give money to the government to spend immediately, with only an IOU in return, rather than invest their own money, for their own retirement, securely stowed in their own account.

Both political parties need intellectually weighty, honest and articulate leadership to inspire the nation to address the immense and complex challenges of deficits and debt that truly threaten the America we know and love .  Conservative leaders, rising out of a populist tradition, have been insufficiently brainy and articulate.  Paul Ryan, should he assume leadership of the Republican Party, would completely reverse this trend.  President Obama, while possessing some impressive intellectual credentials, has been disappointingly dishonest on many issues, most notably those involving the true cost of his healthcare plan.

If Paul Ryan were to lead the Republicans in 2012, he would force a substantial debate about the issues that really matter – the nation’s debt and deficit, and the related public services on which we depend.  Ryan’s quick-mindedness would make Democratic dissembling more difficult and might bring out some of the nobleness of character that so many Americans thought they saw in candidate Barack Obama.

Ryan sits on the President’s deficit commission, which is all well and fine; we hope they can find a bipartisan solution behind their closed doors.  But Democrats should man-up (or woman-up in the case of Speaker Pellosi), by standing and delivering their own deficit and debt reduction program.  They should engage the passionate young conservative reformer, Congressman Paul Ryan.   It is time for bright and honest people to make the hard choices.

It is certainly a strange time not to have a federal budget.  Budget resolutions are non-binding, but like a family budget, they do provide a framework for controlling spending.  The federal debt is scheduled to rise to over 90% of GNP in five to ten years, leading to a Greece-style economic collapse. But unlike Greece, there is no one out there to bail us out.  A fiscal 911 is on its way, except it won’t be a surprise. When will we act to stop it?

Before the Democrats took office  the national debt was $56,000 per household.  Now it’s $72,000 per household.  These figures do not count the $379,000 per household in unfunded liabilities for Social Security and Medicare.

Some have said for a long time that we need a lockbox for Social Security and Medicare.  But through their inactions our politicians have always responded, “We don’t need no stinking lockbox!”  They have spent all of those payroll taxes, including those paid by some of America’s lowest-wage workers. Nothing is there but an IOU.  Demographics have turned a reasonable program into a pyramid scheme worthy of Bernie Madoff while Congress, term after term, has buried its head in the sand.  Re-elections are, after all, more fun than hard choices.

And now, in times of increasingly harder choices and oncoming fiscal calamity, Congress is not even planning to restrain spending through the use of a tool as routine as a budget.

Forget terrorism, global warming or any social problem that might come to mind.  In the United States and in Europe, debt is the crisis of our time, and our “leaders” – President Obama, House Speaker Pelosi, and Senate Majority Leader Reid – are willfully looking the other way.  Moreover, they have made the situation much worse through the creation a new entitlement – an attempt at universal healthcare insurance – without first reforming the old entitlements.  Indeed, like the bandits in The Treasure of the Sierra Madre,  they robbed to get what they  wanted: they stole from Medicare, a program already going broke.

The Democrats poured in $125.9 billion so far to bail out Fannie Mae and Freddie Mac (institutions Democrats refused to reform years ago), with no effort to change the programs partially responsible for the financial collapse.  Fannie and Freddie need no stinking badges either, just taxpayer cash.  Now they want $19 billion more to save private profit at public expense.  At least bailed-out corporations in wholly private industry, from Goldman Sachs to GM, are paying back owed taxpayer money.  If you want to know why Fannie and Freddie are not being reformed, just look at who they are paying off with campaign donations.

Certainly not all of this debt is the Democrats’ fault.  Congressional Republican majorities have not lifted a finger to reform entitlements either.  President George W. Bush added a Medicare drug benefit without paying for it, and launched the war in Iraq, which was wrong for a lot reasons, including its massive expense.  But Bush, to his credit, tried to reform Social Security.   Congress said no.

Unless something changes, Obama, Pelosi and Reid will be remembered as the Neville Chamberlains of the Great American Fiscal Collapse. Politicians don’t seem to appreciate the extent to which the American people demand action on spending and the debt.

Concern – or fury – over federal spending and the growth of the national debt is at the heart of the Tea Party movement.   The Left likes to pretend that the Tea Party consists of racists and other nitwits without any legitimate arguments to make about the direction of the country, but demonizing the Tea Party won’t work.  Most Centrists and Independents, and even many Democrats, though they do not watch Glenn Beck or believe that Sarah Palin is presidential timber, share Tea Party concerns about out-of-control federal spending.  They will vote to purge any politician, Democrat or Republican, who appears to put a political career above the fiscal stability of the country.  Tuesday’s results and recent elections in Virginia, New Jersey and Massachusetts offer ample evidence of this.

Congressional leaders obviously lack the courage to pass a budget.  They don’t want to showcase their fiscal irresponsibility, call for higher taxes or cut spending, so they refrain from passing a budget and hope no one notices.   But citizens are paying attention.  Here’s betting that the American people won’t sit by and watch the United States destroyed from within by irresponsible politicians who care more about their ideologies and political careers than they do about the long-term good of the country.   Politicians who don’t bother to write a budget to live by in these fiscally perilous times betray the public trust and are unworthy of the offices they hold.

All of this is serious news.  What’s even more important is the connections among the stories.

Let’s start with Greece.  Why was there violence in Athens, and why are there strikes across the nation?  Because the European Union (EU) and the International Monetary Fund (IMF) announced that strings are attached to the  $140 billion in bailout money they’ve committed to loan Greece.

Greeks have been told that the government cannot continue to live beyond its means.  With public wages and pension plans comprising 51% of government, the belt-tightening of necessity involved the unions taking a hit.

Government–employee unions led the strike, a protest against austerity measures imposed by the new creditors, who are properly alarmed by deficit and debt levels currently 13% and 124.9% of GDP, respectively. Greece has promised its creditors to reduce public-sector pay, decrease pensions and increase retirement age, and deregulate the labor market.  The government also pledges to deregulate industries and privatize some state industries, raise value-added taxes and excise duties, and crack down on tax evasion.

Even so, Greece projects debt levels rising to 149% of GDP before they start to decline.  Greece is not known to over-estimate problems. Last year’s actual deficit of 12.7% was more than triple the 3.7 % the government had publicly predicted.

Across the Atlantic, the US Senate voted 93-5 in support of a financial-reform amendment submitted by Christopher Dodd (D-Connecticut).  The goal of Dodd’s provision is to eliminate the possibility of any financial company becoming “too big to fail” and therefore a candidate for taxpayer bailout funds.  Accordingly, it creates new tools and broad new powers to break up failing financial companies.   A $50 billion emergency pool is not among those tools.  Instead, liquidation costs incurred by the government will be recouped from the financial-services industry in general and creditors of the failed entity in particular.

Scrapping the $50 billion bailout fund was a concession to the Republicans, who worried that its existence would actually encourage both banks and their investors to take more risks.  Reassured, they signed on, en masse.

Meantime, Freddie Mac has requested another $10.6 billion from the government. This quasi-government organization reported losses of $8 billion in the first quarter of 2010 and says it needs the funds to shore up its balance sheet. Freddie has already received $52 billion from the government to pay for earlier losses. Through the end of 2009, Freddie Mac and its sister organization Fannie Mae lost a combined $126.9 billion.  This figure makes the twins by far the biggest losers in the financial panic.  Even so, it’s a gross underestimate of the total carnage Freddie and Fannie wreaked on economies across the world.
Both Fannie Mae and Freddie Mac are government-sponsored entities (GSEs), in the business of making sure that funds are consistently available to institutions that loan money to home-buyers.  The main difference between the two appears to be Fannie’s greater age, having been born during the Great Depression. Both are now owned by stockholders.  Both buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities.  Hm.  Aren’t these derivatives?  Has the same government who decries the evils of  derivatives actually been subsidizing some through these two GSEs?

Although “transparency” is one of government’s favorite reform bullets, Freddie’s and Fannie’s operations are so opaque they’re even off budget.  They’re so opaque the two were able to hide how much they were gambling on subprime and Alt-A mortgages, thereby making it hard to discern how large and risky these markets truly had become.  Additionally, by implicitly guaranteeing their products, the US government made it possible for them to sell market-backed securities across the globe.  By attracting more capital than investors would pledge if there’d been more transparency in their products than just the government guarantee, Fannie and Freddie made the housing bubble bigger and its popping more catastrophic.

And yet, the twins have not been part of the financial reform packages so far discussed by the Senate.  They keep getting more money from the government, and the additional gifts guarantee additional losses.  The Congressional Budget Office (CGO) estimates that the red ink from 2008 through 2020 will total $380 billion.  Wall Street has paid back most of its government money, with hefty rates of interest.  Fannie and Freddie are still at the trough, appetites ever growing.

Around the world, governments are spending more than their income.  Greece shows us that they, too, can fail, and being considered “too big to fail”, get bailed out at taxpayer expense.

In Greece’s case, the taxpayers initially come from other countries in the EU, some of which have major fiscal problems of their own.  Greece is likely to need more bailouts in the near future as more bonds mature.  Will it really reform its economy and its government, or will it cave to vested interests like its unionized government workers, who seem not to understand the basic economics or choose to make others suffer rather than reduce their comfortable standard of living.

The United States is also on an unsustainable course of ballooning deficits and debt.  The federal government has extended its management to the health industry, the (unionized) auto companies, and the financial, energy and environmental sectors.  In assuming responsibility for 1/6 of the economy with health-care “reform”, our government claims fiscal restraint by acting as if increased Medicare taxes and decreased Medicare waste pay for expanded health-care.  Instead, if real, they could have been enacted as part of Medicare reform, paying for some of the mounting deficits in Medicare itself.

The federal government deals with some of its fiscal problems by pushing them off into the future or over to the states.  Obamacare again illustrates the strategy. Two other reasons it’s billed as economically sound are that the CBO could only project out ten years, during which decade the revenues come in four years before the payments go out; and that some federal Medicare responsibilities have now been fobbed off to the states.

The US should make politically more difficult decisions like the austerity measures creditors are imposing on Greece.   They should allow contract competition from non-union labor.  They should reduce the benefits from public-servant pensions and private-servant Social Security.  And to make financial reform basic and real, they should eliminate Freddy’s and Fannie’s lines of credit and other special perks.  Without make these hard decisions and many more, the US is likely to be in Greece’s desperate situation.  Even with these measures, the US is likely to be in the EU’s position.  Just replace “Greece” with “California”, “New York”, “New Jersey” or “Illinois” –  states that may not be able to persuade investors to buy new issues when old bonds come due.

Unifying all these sad stories is a world that wants other people to take the hit for financial irresponsibility.  How do the state unions and pensioners think Greece can reduce its deficits without cutting the 51% of government spending they comprise? Doesn’t the US understand that we too are on a path to fiscal bankruptcy, on both the federal and the state levels, with many localities also in dangerous financial straits?  How does the Senate think it can reform finance while failing to acknowledge or change the roles of Fannie and Freddie in creating and prolonging the crisis?

It’s so easy to blame Big Banks and Other People.  But responsibility for feckless behavior should be shared by everyone who takes on a mortgage with minimal deposits and monthly payments that are affordable only under the sunny assumption that unexpected problems will never arise and incomes will always rise.  It should also be shared by every politician who angles for special projects or supports more spending without more revenue.

Regulation should start with individuals regulating themselves, in and out of government.  We must look in the mirror and see ourselves as people who refuse to acknowledge scarcity, respect budgets, and distinguish between needs and wants.  We must stop spending as if there’s no tomorrow.  We must grow up and stop shifting responsibility to other shoulders and other times.  We must stop electing politicians who cater to our weaknesses.

Republicans John McCain, Richard Shelby and Judd Gregg have introduced another amendment to the Senate financial-reform bill.  Scheduled for a vote on Tuesday, it calls for reform of Fannie Mae and Freddie Mac.  Among other things, the three Senators recommend ending the government conservatorship that has enabled the twins to be so financially irresponsible. An amendment on these lines is an integral part of financial reform.  The votes it attracts will show just how serious we are about achieving not only financial but fiscal sobriety.

The best example politicians can set for the rest of us is to look into the mirror as well and see that they are part of the problem and must be part of the solution.  They should represent the best, not the worst in us.

President Obama is expected to announce today a $3.8 trillion budget with a $1.2 trillion deficit for FY2011.  Here’s the context within which he will reveal his plan.  For decades now, the federal debt acquired through years and years of deficit spending has been the “elephant in the room” – the huge presence nobody talks about but everyone knows is there.  In last week’s State of the Union address, however, debt joined unemployment as the two most urgent issues facing America as Obama enters his second year as our President.

Last year, the White House and Congress went “Keynesian” in a big way as the real-estate bubble popped and started to pull Wall Street and Main Street down with it.  In crisis mode, they quickly passed stimulus bills designed to unfreeze credit and prevent the rate of unemployment from reaching double-digit percentages through a combination of renewed lending and “shovel ready” government spending to increase overall demand.

Last fiscal year, our federal deficit reached a record $1.4 trillion, and it’s projected to total $1.7 trillion this fiscal year, the first quarter of which has already seen spending exceed revenue by $389 billion, a 17% increase over the same period a year before. But as we enter February, unemployment resists declining below 10%, and debt as normally configured has reached almost $12,300,000,000  – or roughly $40,000 for every man, woman and child in America.

On January 12, the Obama Administration announced that its Council of Economic Advisers determined that the $787 billion stimulus program “saved” or “created” between 1.5 and 2 million jobs during 2009. Using the upper bound, that’s $393,500 per job. The “what if” ‘s of history cannot be proved, they can only be stated.  But even if we accept the upper bound as a true of the extra unemployment we’d have suffered if the Administration’s policies had not been implemented, it’s hard to conclude that our money has been well spent.  At best, each job has cost us $393,500, while none is regarded as permanent and the average compensation for comparable work is surely less than $75,000 on an annual basis.

<em>Pace</em> John Maynard Keynes and his new followers, it looks as if new government spending programs and the concomitant deficits are hurting, not helping recovery. Consumers, savers, and businesspeople alike worry about which taxes are going to increase and by how much to avoid continued debt explosion.  We also worry about what’s going to happen to interest rates and their effect on private borrowing expenses and the carrying costs of the national debt.

How, then, should we analyze the debt and its effect on the economy?

First of all, it’s ridiculous and misleading to compare today’s $12 trillion with, say,1950’s  $357 billion because of the cumulative effect of inflation over the last 60 years.   And we should also correct for growth in the economy.  After all, whether a $200,000 private mortgage is extravagant and foolhardy or modest and frugal depends upon the income of the borrower.  The following graph basically makes both of these corrections.

As is the case with most statistics, the tone of the story depends on its starting point.  Begin in 1945 if you want to relax, in 1980 if you’re okay with having your blood pressure soar.

Either way, two other adjustments are also appropriate. We should rework the numbers for automatic stabilizers, and we should separate government spending into consumption and investment categories, just as we do for private spending.

The Beltway doesn’t have to change anything to get some Keynesian stimulus spending going.  As unemployment increases, welfare payments will rise and tax revenues will fall, increasing or creating deficits.  If there’s any validity to Keynesian Economics, these quick developments are appropriate, and fair assessment of deficits should reconfigure the sums with these formulaic changes in mind.  We should find out, in other words, what the difference between spending and taxing would be at a level of employment considered “full”.

Our evaluation of debt should also depend in part on whether it’s being acquired through consumption or investment spending. We should be less concerned about deficit spending that finances investments than we are about deficits fueled by transfer payments properly categorized as consumption. Just as the probity of taking on a $200,000 mortgage depends on income (and its security), so is it sometimes okay and even good to take on some debt when acquiring an asset like a home, but not so good to finance a shopping bender in the Mall of America or a new car (which loses half its value right off the lot).

Unfortunately,“investment” is a malleable term that politicians will use to their advantage and not to ours.  Is the War in Iraq an investment in our future (which includes national security, itself dependent on reliable supplies of oil)?  Is Obama’s likely proposal of a huge increase in spending on education an investment in our youth, the individuals whose payroll taxes will be funding our Social Security checks?  Or, absent reform, is it more like income redistribution and consumption?

The issue of Social Security demands more scrutiny.  It also requires grit.  While insight is gained, the comfort our graph of debt/GDP can provide if we start with the Truman years is trashed.  The US could reduce national debt as a fraction of national income after World War II fairly easily because budgets weren’t encumbered by entitlement programs as they are today.  The value of these programs is not in question.  The problem is their cost, both in dollars and in flexibility and control. Baby-boomer demographics were not in play during the  1940s.

The unfounded future liabilities in entitlement programs like Social Security and Medicare dwarf all other deficit and debt concerns.  Neither has a nest egg adequate to the soaring payouts the formulas predict as baby boomers become eligible for benefits and are expected to live longer than their parents and be supported by taxes on a smaller work force. Last year alone, the combined debt of these two programs rose $5 trillion
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The fiscal health of our federal government is also worse than today’s debt figures would indicate because they fail to include off-budget items like subsidizing Fanny May and Freddie Mac.  Last week, the Congressional Budget Office reduced its guesstimate of another decade of their financial support by a whopping $20 billion. Yea!  But that leaves $79 billion still expected to be expended and begs the question of why these important players in the real-estate bubble remain “outsiders” even though any pretense that they’re run for a profit should long have been abandoned.  Time will tell, but the move to increase their loss limits does not auger well for us taxpayers.  It’s a cheap trick for the government to take quick credit for the positive effects of subsidizing mortgages through Fan and Fred, their cousin Ginnie Mae and uncle FHA, while failing to account for all the default risks accumulating as loss ceilings rise.

And then there are all the times the federal government improves its budget by fobbing off responsibility for funding certain programs to the states.  Medicare mandates are one example of this cost shifting.  In assessing government debt issues, we should be looking at all three levels of government – national, state and local, with an eye not only to their totals but to whose debt is really whose.  Should federal mandates really be paid by the states?  For what government spending should the counties, cities and towns be responsible?

Another matter involves the cost of servicing all this debt.  Like entitlement programs, interest payments are a huge part of overall government spending – indeed, its fourth largest category.

To whom are all these interest payments made? In times past, almost all debt holders were Americans, so we could call these payments mere “transfers” among our citizens.  Increasingly, however, our debt goes overseas, where China, Japan and the UK are currently our largest debtors.  Their holding our debt helps finance our trade imbalances and keeps our interest rates lower than they might otherwise be, but it also makes us vulnerable to outside change and exchange-rate issues.

It’s a good thing that we are now talking about the Elephant of Debt in the room.  The focus for reform, however, should not be debt but rather the growth in government spending, expected to reach 35% of GDP this year.  That’s the real, and even larger elephant whose presence we’ve been ignoring.

In the case of pulling an economy out of recession, it can be argued, although not with complete confidence these days, that additional government spending can actually increase private production.   In the case of full employment, however, all government spending takes the place of private spending.  If it’s funded by debt, interest rates may rise and “crowd out” private investment.  If it’s funded by taxes, the consequent declines in consumer demand and company profits will also cause private investment to decrease.

The key issue then becomes whether diverting resources to government use improves the public weal or not.  The consequences of whether the spending is financed by today’s taxes or by tomorrow’s taxes, for all their importance, remain secondary.  An important difference would involve whether voters respond more strongly to tax or debt increases and through their response can impose adequate spending restraint on politicians approving the programs.

How do we change the current trajectory of the ratio of government spending to GDP?  Given all the worthy entitlements and the difficulty of defining and controlling “waste”, the most attractive option is to grow the economy.  Investment in equipment, technology and people is key.  The question, then, is whether and to what degree the government, rather than the  private sector, should undertake these investments.  We already know that predictability in tax and regulatory legislation is a necessary first step.

“Hardest hit?”

Over-60’s in America have the highest net worth of any age group in the entire world. In addition, seniors can’t be fired because they’ve already retired. It’s people in younger demographics who have lost their jobs and suffer as earned income has been reduced all the way down to zero. The more you have, of course, the more you can lose; perhaps President Obama was thinking about total financial losses, not relative loss and absolute suffering, when he continued, “This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis.” This kind of thinking does not comport well with progressive values.

The subsidy for seniors is likely to be regressive for other reasons as well. As a group, seniors tend to follow investment rules that urge them to hold a smaller percentage of their portfolios in stocks the older they get. Seniors with relatively large holdings of T-bills, bonds and other fixed income did not suffer the huge losses of younger cohorts with portfolios more heavily weighted in stocks and new-fangled instruments like derivatives.. In any event, the stock market has already recovered an almost absurd percentage of its losses. Yes, housing values have fallen dramatically pretty much across the board, but seniors, at least, tend to have old mortgages, still worth substantially less than the market value of their homes. Among seniors, in other words, net worth in this asset is likely to remain positive.

The case for the $250 giveaway is less weak when the conversation shifts from assets to income. The fall in interest rates has also been dramatic. To the degree that seniors have owned bonds that were called or came due, they have suffered from significant declines in income. But America’s expansionary monetary policy will soon raise interest rates back to or above the old rates to compensate for expected inflation, and financing so much additional debt will force real interest rates to new highs as well. Runaway debt will help seniors recoup their losses sooner than other groups.

If hardship is the real criterion here, government gifts should be handed to the poor. There’s nothing “needs based” with the current proposal. It’s simple age discrimination in a positive direction for our seniors. Surely increasing the bank accounts of the elderly is not the best use of additional government funds.

Obama’s proposal and pitch for the second stimulus spending package for seniors occurred the day before the government announced that there would be no increase in individuals’ Social Security monthly checks next year. The reason for no raises is not fiscal constraint and stinginess but formula. And the asymmetric way the formula works – automatic compensation for inflation, no charge for deflation – has already guaranteed recipients increased real benefits in 2010.

2010 is the first year Social Security benefits have not increased since 1975, when Congress passed Cost of Living Adjustment (COLA) provisions for Social Security. Some have argued that the index Congress chose overcompensates elders because its weighted basket of goods was designed to reflect the spending patterns of the urban employed, not the urban and rural retired. Whatever. Last January, following this formula, Social Security payments increased by 5.8%. Not since 1982 had so substantial an adjustment occurred, and the spike in energy costs was the driving factor. As we all know, one of the few benefits of this recession has been the fall in energy prices – 30% in gasoline alone and 23% in energy as a whole. Accordingly, the index for 2010 payments showed a decline of 4%. Holding monthly payments steady actually represents a significant increase in real benefits and purchasing powers. The American Enterprise Institute calculates this gain at $725 per person.

Are all seniors grateful for the asymmetric application of COLA that precludes any decline in nominal benefits even though the COLA turned negative? No, they are not. Is their discomfort assuaged by Obama’s $250? No, it is not. At least some seniors fail to understand or refuse to accept the formula for their benefits and the fact that 2010 benefits do increase their welfare. The Senior Citizens League (TSCL) reports rather angrily that people retiring in 2009 (maybe the first of the baby boomers, taking slightly early retirement) will each lose $10,134 over 20 years. TSCL, a soi-disant “nonpartisan” group of 1.2 million seniors, sources this sum in its projection of the compounding effects of 3% average annual benefits over two decades. Few of us know where that 3% figure came from, but we all know that $250 is chump change compared to $10,134.
Okay. Seniors are probably less hard hit by the recession than other worthy subsets of the population, and they’ve already been promised a reward in 2010 by experiencing no decline in their monthly checks from Social Security.

The ethics of additional $250 gifts are dubious. Maybe the lump-sum payment still has some economic justification as a delayed addition to the stimulus package? Perhaps. But this motivation is also shaky. People tend to save some of the relatively small lump-sum payments they’re doled out on a non-recurring basis from the government. A program like this doesn’t provide a large stimulus bang for the buck. It doesn’t increase consumption and investment as much as direct government spending or reductions of current and future taxes on marginal income. Has anyone actually studied the stimulus effects of the first $250?

Any other explanations for this gift? How about politics? Obama needs more support for healthcare reform. Elders are not lining up to sing the praises of any Democratic plan, nor are they promising votes and sending money. Rather, they worry about what happens to their Medicare and Medicare Advantage benefits when $500,000,000 in “waste” moves from these programs to expanded healthcare for the previously uninsured.

$250 given to 57 million people costs $14,250,000,000. But don’t worry: it won’t add to the record federal fiscal-year deficit of $1,420,000,000,000. That budget year is already over, and only the first $14,250,000,000, doled out starting last February, made it into the record books. September, usually a surplus month, ended the fiscal year by adding $46,000,000,000 to the mind-boggling total.

One can only conclude that the proposed $250 handout to the elderly is designed to win their political support for Obama’s extensive agenda. Everyone knows that seniors vote in disproportionately large numbers. But perhaps they’re not so easily bought. To imagine that checks for a mere $250 will assuage the fears surrounding proposed Medicare and Medicaid cuts assumes a high degree of senility among American seniors. Wisdom comes with age, and often people nearing the end of their lives are more likely to choose principles over expediency.

Charles Schultz’s oft-revisited storyline is a useful parable for analyzing some of the politics of healthcare reform today.   Consider Lucy to be government proponents of various healthcare bills and plans; Charlie Brown, some concerned citizens; and the football, those various bills and plans.

Once again, the government is telling us that a huge new program, one affecting more than 1/6 of the economy, will be deficit- and debt- neutral without major increases in taxes.  Why?  Because much the expansion will be “paid” for by waste reduction in Medicare.

The first questions we Charlie Browns – who are expected to be happy and complacently accept these proofs by assertion – must ask include the following.

“What’s the rush? Why are we running at this problem of healthcare reform, which is so large and complex, when we should be approaching it deliberately and thoughtfully?”

“What do you mean ‘waste’?  If this government program has so much waste in it, won’t the new one be wasteful, too? And how come you in Congress haven’t rid this program of “waste” already?”

Then come three other inquiries, based on facts also analogous to Lucy’s pulling away the football.

“Wait a minute!  Isn’t Medicare itself on an unsustainable path?”

“Shouldn’t the alleged savings first go to shoring up this program?”

”What will be left to reduce or finance the increase in government spending the new healthcare plans bring with them?”

Here’s what the Social Security and Medical Boards of Trustees had to say in “A Summary of the 2009 Annual Reports”:

“The financial condition of the Social Security and Medicare programs remains challenging. Projected long run program costs are not sustainable under current program parameters…As we reported last year, Medicare’s financial difficulties come sooner—and are much more severe—than those confronting Social Security. While both programs face demographic challenges, rapidly growing health care costs also affect Medicare. Underlying health care costs per enrollee are projected to rise faster than the earnings per worker on which payroll taxes and Social Security benefits are based As a result, while Medicare’s annual costs were 3.2 percent of Gross Domestic Product (GDP) in 2008, or about three quarters of Social Security’s, they are projected to surpass Social Security expenditures in 2028 and reach 11.4 percent of GDP in 2083.”

Remember now, these are the programs Congress plans to take from in order to create a new and more expansive health care program.  “Come on Charles Brown, kick the football,” they insist.

Here’s a graph to help bring home the point.  It comes from the same report.

You will note that if payroll taxes stay steady at 1.5% of GDP, more and more of the funding for this program must come from “general revenue” – that is to say, “tax increases”.  You should note as well that Timothy F. Geithner, Secretary of the Treasury, is also Managing Trustee for Medicare and Social Security Funds, and first to sign this report.  And remember that rising medical costs are only one variable underlying these graphs: another is demographic change – the baby boomers were born 1946-1964, and the oldest are about to become elderly and eligible.

Last week, Senate Finance Chairman Max Baucus, himself author of a healthcare reform bill, ordered Medicare regulators to investigate, and possibly punish and gag, Humana for communicating with some of its members that their Medicare benefits may be cut.

Humana, played by Lucy’s brother Linus, yelled from the sidelines, “Don’t do it Charlie Brown.”  Lucy punched Linus in the nose.

September 24’s Wall Street Journal suggests that consistency of approach dictates silencing Congressional Budget Office (CBO) director Douglas Elmendorf as well. He is, after all, on record for telling Senator Baucus’s committee that its proposed $123 billion cut from Medicare Advantage will cause lower or lost benefits for millions of current beneficiaries.  Let’s add Tim Geithner to the gag list as well.

Yes, Sarah Palin’s reference to government “death panels” was over-the-top hyperbole.  On the other hand, is it any wonder that Seniors are nervous when politicians say there are going to cut “waste” from a program that Seniors rely on, especially when that program is running out of money without any additional “cost cutting”?

Before we Charlie Browns of the country tie on our running shoes, we should insist that any new funding for an expanded healthcare program come from sources other than Medicare and Medicaid, programs already headed into fiscal freefall.   Just as Lucy does to Charlie Brown, our elected representatives insult our intelligence.  Even in real life people can be cartoonish, but healthcare and the fiscal health of the nation are serious business.