I didn’t pay a lot of attention to the debt ceiling debate in Congress or its ultimate resolution, which was to borrow more money and promise that a group of future politicians would raise taxes and/or cut spending at some point between the year 2013 and never.
A more thorough analysis was the cover story of Business Week for July 27: “Why the Debt Crisis Is Even Worse Than You Think”.
There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadn’t been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nation’s finances would be in fine condition today. And the only obstacle to getting there again, this narrative goes, is political dysfunction in Washington. If the Republicans and Democrats would just split their differences on spending and taxes and raise the debt ceiling, we could all get back to our real lives. Problem solved.
Except it’s not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nation’s financial condition. It includes only a small portion of the nation’s total liabilities. And it’s focused on the past. An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.
…
Even in the late 1990s, when official Washington was jubilant because the national debt briefly shrank, fiscal-gap calculations showed that the government was quietly getting into deeper trouble. It was paying out generous benefits to the elderly while incurring big obligations to boomers, whose leading edge was then 15 years from retirement.
Mostly using numbers from the Congressional Budget Office, an analysis shows that the U.S. government is about $211 trillion short (i.e., the $14 trillion headline debt is the least of our worries). The article doesn’t link to the analyses that it cites, so it is tough to know what assumptions went into them [this article by Kotlikoff is the closest that I’ve found]. It seems reasonable to conclude, however, that the shortfall would be much larger than $211 trillion if our economy doesn’t grow as expected and/or if Americans begin to live longer than expected.
The debate worth having is how we are going to divide America’s income between the working and the non-working and how much of America’s income we want to put into health care, military adventures, and other overhead areas that will not produce a return on investment. Our Congress, at any rate, is not having this debate so it probably isn’t worth anyone’s time to pay attention.
Since our Congress is not having the debate that it should be having, what should a lowly(though still young and employed) citizen like myself do? Start buying gold? Start putting my money into the stocks of multi-national corporations? Immigrate to countries like Canada, or New Zealand?
The trouble I have with understanding the numbers is that I can’t tell how sensitive they are to initial assumptions. Would raising the retirement age to 72 make the problem go away? What about a $50 copay for medical visits? Googling shows some numbers, but doesn’t give a good idea of the solution space. Is a solution just politically untenable, or actually hard?
Phil, did you also see the article in the next BloombergBusinessweek, looking at the debt ceiling debate from the point of view of game theory? It was even more depressing, as it implies the issues really didn’t matter at all.
Bob: I think history shows that ambitious bright people who emigrated from slow-growth countries such as England ended up having much better careers than those who stayed. So you have to balance your desire to stay near friends and family with your ambition. The U.S. is still a pretty comfortable place for the competent, but, just as it is much easier to move up in a rapidly growing company, it probably won’t be a great place for most young people to advance.
Lawrence: Given that they are projecting out to 2085 or beyond, I think the analysis is incredibly sensitive to every assumption, especially regarding GDP growth rates and interest rates. Raising the Social Security age gradually has probably already been factored in since I think some increase is already planned.
Matt: I did not see the next article. Link?
Here’s the link:
http://www.businessweek.com/magazine/the-debt-ceiling-deal-the-case-for-caving-08032011.html
Thanks, Matt. I think that the article just highlights the weakness of a two-party non-parliamentary system for a country that is not growing economically. The U.S. political structure has not been adopted by other countries and perhaps this is an illustration of why not. Our system is good at the easy stuff, e.g., how much of the latest economic growth to hand out to political cronies, but not good at the hard stuff, e.g., telling voters that all of their money has already been pledged to those cronies.
Any analysis based on Englishmen’s careers that show up in history probably suffers from sample bias.
Liabilities calculated over 85 years should be balanced against assets not revenues. As you said this is all very sensitive to assumptions both positive and negative (it’s not too presumptuous to imagine there might be a couple 90’s style boomlets, whether led by US or China/India/Brazil…)
We should become more efficient with energy and healthcare costs… but per patient healthcare costs are much lower in many other developed countries http://www.kff.org/insurance/snapshot/OECD042111.cfm , and energy efficiency is also much better in many other countries (both happened with quite a bit government policy: standards, goals, even price controls, etc), so we know we should be able to improve
Finally I have a back up plan: every year or two we have a foot race in every community, bottom quintile is stripped of their assets and positions and sent into the forest – Healthcare cost curve is Bent!
It’s probably not unreasonable to imagine that it could take a full generation of sacrifice to fix the economic situation in the United States. And my sense is that the majority of Americans don’t come close to understanding the issues deeply enough to choose the short/medium-term pain of the hard decisions over the always-better-sounding alternatives presented by politicians interested in keeping their jobs.
(Especially the already-entitled, who would be affected in a way that surely would seem unfair. On a recent trip to the US, discussing this with my retired parents, who are “steaming mad” about the whole situation, I asked if as part of a solution they’d accept a reduction of benefits. “No way! I’ve already paid my part.”)
So in all seriousness, what hope does the United States have of correcting course before its too late?
Matt: On the “full generation of sacrifice”, that’s pretty much what the Asian Tigers did during their years of 5-10% annual growth. Over a period of decades, they invested something like 30-40 percent of GDP in capital equipment, infrastructure, etc., and hardly used any of their higher incomes for consumption. So it is a proven path to success, though it also requires political stability and we have less of that than the Asian Tigers did (e.g., they didn’t have anything equivalent to our public employee pension and entitlement overhangs and consequent uncertainty about what would happen when the money ran out; higher taxes? cuts? inflation?).
I’m not sure who would have an incentive to try to “correct course” in the U.S. as you suggest. The people who would suffer would be today’s adults, i.e., those who vote. The people who would benefit would be today’s infants, i.e., those who do not vote, and the yet-to-be-born. I’m not even sure that young people are sophisticated enough to realize what is being done to them. I’ve never found a high-school age kid who was opposed to our government’s current deficit spending policies or ladling out infinite money to a health care system that they basically don’t use (since a 16-year-old seldom gets sick). They somehow don’t connect the “government borrows $1.5 trillion this year” with “I will one day pay higher taxes to pay that money back to the Chinese”. So where is the interest group that will push for actions today that will enable 35-year-olds in the year 2050 to enjoy good job opportunities, reasonable tax rates, low inflation, etc.? And if there is no interest group, our political system really has no way to respond to that goal (see Mancur Olson in http://philip.greenspun.com/blog/2009/03/16/how-rich-countries-die/ ).
Have you played with the interactive budget/debt puzzle?
http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html
It includes things from a lot of categories and fun stuff like raising the retirement age, medicare eligibility, taxes and military spending. I like that it gives some perspective about have various policy proposals would really (or not) impact long-run deficits. It’s noteworthy that the option to “Cap Medicare growth starting in 2013” results in the single largest savings (by 2-fold or more than most anything else). Our long term money problems seem *way* more related to the costs of promised medical care than anything else.
Christopher: Thanks for the link. It is sort of a fun exercise, but maybe too limited. It doesn’t offer, for example, “eliminate mortgage interest deduction” as a standalone item (though it is in there with the Bowles-Simpson plan to cut rates at the same time). Nor do they offer the option of “stop pretending that we are badasses; admit defeat; pull out of Libya, Afghanistan, and Iraq immediately”.
Even the Medicare cap was crazy, in my opinion. The option is to limit its growth to GDP growth + 1%. I.e., take a country that already spends the world’s highest percentage of GDP on health care and vow to spend yet a higher percentage.
I just wish that we had a Medicare-style system for computer programming. People would come to me with their needs. I would decide how much programming they needed and then bill the government for my time and effort. It would likely turn out that the average person needed a lot more software development than he or she originally thought.
Spot on. The debt ceiling was about raising the credit limit. The real problem is the US is jobless with $250k in credit card and and a house underwater 🙂
Debt limit was a bit of deck chairs on the Titanic.
Two links worth reviewing, both from Kevin Williamson at the National Review. In the first link, Kevin puts the government obligation problem closer to $140 trillion:
http://www.nationalreview.com/articles/229942/other-national-debt/kevin-williamson
In the second link, he takes a pretty impressive back of the envelop stab at solving the crisis:
http://www.nationalreview.com/exchequer/273486/back-envelope-balanced-budget
Of course none of this is politically possible right now. And it never will be. Our legislators aren’t going to cast a series of votes that fix this. Everything will continue just as it has until it can’t. At that point we’ll either have another civil war if both sides can agree on the social issue that separates us, or we’ll become something like modern Russia where official corruption and gov’t connections determine all.
Both are ugly. One is more deadly. The other more soul-destroying.