I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?
But I can't help myself. I feel like I'm watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg,
yet they're still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don't bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.
We now have the book version of this grim movie. It's called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.
If you're a fiscal policy wonk, it's an exciting publication. If you're a normal human being, it's a turgid collection of depressing data.
But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.
I've selected six charts and images from the new CBO report, all of which highlight America's grim fiscal future.
The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.
The U.S. is bankrupt. Of course, Uncle Sam has the power to tax. But at some point even Washington might not be able to squeeze enough cash out of the American people to pay its bills.
President Barack Obama would have everyone believe that he has placed federal finances on sound footing. The deficit did drop from over a trillion dollars during his first years in office to “only” $439 billion last year. But the early peak was a result of emergency spending in the aftermath of the financial crisis and the new “normal” is just short of the pre-financial crisis record set by President George W. Bush. The reduction is not much of an achievement.
Worse, the fiscal “good times” are over. The Congressional Budget Office expects the deficit to jump this year, to $544 billion.
The deficit is not caused by too little money collected by Uncle Sam. Revenues are rising four percent this year, and will account for 18.3 percent of GDP, well above the last 50-year average of 17.4 percent. But outlays are projected to rise six percent, leaving expenditures at 21.2 percent of GDP, greater the 20.2 percent average of the last half century.
A recent report from the Social Security Advisory Board’s Technical Panel found that the 75-year shortfall could be 28 percent (roughly $2.6 trillion) larger than the estimate in this year’s Trustees Report due to changes in some of the underlying technical assumptions. This disparity is more the product of the difficulties related to projecting the trajectory of a program as large and complicated as Social Security so far into the future, with the chair of the Technical Panel taking pains to reiterate that “the methods and assumptions used by the Social Security actuaries and Trustees are reasonable.” Even so, the report reveals the uncertainty related to the long-term projections for Social Security, with relatively small changes to some of the underlying assumptions significantly changing the program’s financial solvency outlook. Social Security is the largest government program in the world, and changes in its fiscal outlook could have a large impact on the government’s overall finances.
The changes in the Technical Panel report that would have the largest impact are concentrated in a few variables:
- Higher fertility rate
- Higher life expectancy
- Higher interest rates
Other changes to inflation and real earnings growth rate assumptions have a small negative impact, while changes to immigration assumptions slightly improve the program’s financial picture. Some of the changes reflect developments that are good overall but have a negative impact on Social Security’s finances, like higher life expectancy.
Some of the panel’s recommendations focus on making the methodology of the Trustees’ Report more transparent and the degree of uncertainty more clear. While it’s possible that unforeseen changes to underlying variables like the fertility rate could improve the program’s financial outlook, it is much more likely that the trillions in unfunded obligations published in the Annual Trustees’ Report understate the shortfall, if anything.
Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.
Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.
The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here's some of what CBO reported about government spending in its forecast.
The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. ...If current law remained generally unchanged..., federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.
And why is the burden of spending going up?
Self awareness is supposed to be a good thing, so I'm going to openly acknowledge that I have an unusual fixation on the size of government.
I don't lose a wink of sleep thinking about deficits, but I toss and turn all night fretting about the overall burden of government spending.
My peculiar focus on the size and scope of government can be seen in this video,
which explains that spending is the disease and deficits are just a symptom.
Moreover, my Golden Rule explicitly targets the spending side of the budget. And I also came up with a "Bob Dole Award" to mock those who mistakenly dwell on deficits.
With all this as background, you'll understand why I got excited when I started reading Robert Samuelson's column in today's Washington Post.
Read the rest of this post »
Well, there’s a presidential whopper. Obama is right that the role of the federal government deserves an important debate, but he is wrong when he says that we’ve had that debate. Just the opposite: The White House and Congress have spent the past five years evading the debate. They’ve argued over federal budget deficits without addressing the underlying issues of what the government should do, what programs are unneeded, whether some beneficiaries are undeserving... The avoidance is entirely bipartisan. Congressional Republicans have been just as allergic to genuine debate as the White House and its Democratic congressional allies.
There's a saying in sports that teams that come back to win in the final minutes often "snatch victory from the jaws of defeat ."
I don't like that phrase because it reminds me of the painful way my beloved Georgia Bulldogs were defeated a couple of weeks ago by Auburn.
But I also don't like the saying because it describes what President Obama and other advocates of big government must be thinking now that Republicans apparently are about to do away with the sequester.
Specifically, the GOP appears willing to give away the sequester's real and meaningful spending restraint and replace that fiscal discipline with a package of gimmicks and new revenues.
I warned last month that something like this might happen, but even a pessimist like me didn't envision such a big defeat for fiscal responsibility.
You may be thinking to yourself that even the "stupid party" couldn't be foolish enough to save Obama from his biggest defeat, but check out these excerpts from a Wall Street Journal report.
Read the rest of this post »
Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), chief negotiators for their parties, are closing in on a deal... At issue are efforts to craft a compromise that would ease across-the-board spending cuts due to take effect in January, known as the sequester, and replace them with a mix of increased fees and cuts in mandatory spending programs.
I'm currently in the Faroe Islands, a relatively unknown and semi-autonomous part of Denmark located in the North Atlantic. Sort of like Greenland, but too small to appear on most maps.
I'm in this chilly archipelago for a speech to the annual meeting of the Faroese People's Party. According to Wikipedia, "the party is supportive of the economic liberalism." But liberal in this context is classical liberal, so they're my kind of people.
I spoke on the economics of fiscal policy and talked about issues such as my Golden Rule and the Laffer Curve, but today's post is about what I learned, not what I said.
The current government of the Faroe Islands, which includes the People's Party, has modernized its Social Security regime with a system of personal retirement accounts. Starting next January, workers will begin setting aside some of their income to finance a comfortable retirement income. When fully implemented, workers will be putting 15 percent of their income in their accounts, creating a system that's even larger than the private retirement models in Australia and Chile.
So why did Faroese politicians take this step? Well, unlike politicians in most nations, they looked at the long-run data, saw that they had an aging population, realized that a tax-and-transfer scheme no longer could work, and decided to reform now instead of waiting for the old system to collapse.
Here's a chart put together by the Nordic Council. As you can see, the Faroe Islands were (and other jurisdictions are) heading to an intolerable and unsustainable situation of too few workers and too many retirees.
By the way, the same situation exists in the United States.
Our population is aging, the Baby Boomers are going into retirement, and birth rates have dropped. Our long-run numbers aren't as grim as some other nations, but our Social Security system is basically insolvent.
Indeed, Social Security's long-run deficit is measured in trillions, not billions. According to the most recent Trustee's Report, deficits over the next 75 years are expected to equal $36 trillion. And that's after adjusting for inflation!
For what it's worth, if a private insurance or pension company kept its books in the same was as Social Security, it would be forced into bankruptcy and its managers would be indicted for fraud..
But when politicians operate a Ponzi Scheme, we're supposed to applaud them for compassion!
This is why it might be worth the cost if we sent the politicians in Washington on a junket (using their taxpayer-financed fleet of luxury jets) to Torshavn, the Faroese capital. They could eat some lamb and fish and learn what it's like to responsibly address a problem before it becomes a crisis.
Or we could save the money and simply force them to watch my video on personal retirement accounts.
P.S. In you like gallows humor, you can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though it's not overly funny when you realize it's a depiction of reality.
P.P.S. You probably don't want to know how Obama would like to "fix" the Social Security shortfall.
P.P.P.S. On Monday, I continue my tour of the North Atlantic with a speech in Iceland on the Laffer Curve. I don't know if I'll say anything memorable, but I'll use the opportunity to learn more about some of that nation's policies, including their very successful privatized fishery system. Iceland has some bad policies, of course, but it's also worth noting that they wisely have rejected membership in the European Union, they've reduced the burden of government spending in recent years, and they also made the right decision when they decided (with help from an outraged electorate) to limit bailouts when their banks went bust. You won't be surprised to learn, though, that the Paris-based OECD has been using American tax dollars to advocate bad fiscal policy in Iceland.