They have not been clever, have allowed themselves to be put on the defensive and have yet to learn how to articulate their philosophy in a way that is both understandable and buyable.
That said, it is only a matter of time before American Socialism will likely prove a failure just as it has wherever it has been tried. (See European tax rates if you believe they do not stifle initiative - See 1 and 1a below.)
Thus, I submit, Republicans will have a second chance and should be preparing for it now and begin honing their message about living within the nation's means, reducing our deficit, strengthening the dollar and bring spending under control by returning to a Federal take in the neighborhood of 18%of GDP down from the 25% currently.
Republicans cannot win by preparing in September for elections in November. Preparation is an all time thing. It is a constant. Republicans have to learn this simple lesson and start implementing it because their chance will come as American's eventually chafe under the oppressiveness of what Obama's policies, when fully instituted, create. One and one A below are stark and dramatic heads up of where we are probably going.
Also see 1b below.)
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An important article by my Israeli Palestinian friend - Khaled Abu Toameh. (See 2 below.)
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The Ballad of the unsung heroes! (See 3 below.)
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The nation's debt only involves morals and worthless paper. (See 4 below.)
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Dick
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In today’s economic environment, we often complain about volatility and uncertainty, but there is one thing I think we can be fairly certain of: taxes are going up. I constantly try to impress upon my kids, most of whom are now adults, that ideas and actions have consequences. In today’s letter we will look at some of the consequences of an increase in taxes. Please note that this is different from arguing whether taxes should rise or fall. For all intents and purposes that debate is over. As investors, our job is to deal with reality. We must play the hand we are dealt. Taxation is a complex issue, but let’s see if a few word pictures can help us understand what we face.
Two quick notes to begin with. The full video interview with David Krone and Rob Lehman, the chiefs of staff for Senate Majority Leader Harry Reid (D-NV) and Senator Rob Portman (R-OH), two of the key figures in the current budget negotiations, is now available online. This was not a debate but a thoughtful exchange of ideas and positions that occurred as part of our recent Post-Election Economic Summit. It is helpful to recognize that negotiations over the fiscal cliff were being conducted weeks before the election. Everyone knew what was coming, and the very professional staffs that are charged with coming up with a reasonable resolution to the issue were already hard at work, knowing that there would be a lot still to do after the election. Krone and Lehman are two men at the very center of that debate.
If you want to get some real insight into the congressional process, this is an excellent way to do it. I’m grateful that they agreed to sit down for this rather unprecedented sort of interview. You can watch the full interview. You can also view an edited version of the entire Post Election Summit, with Mohamed El-Erian, Dr. Gary Shilling, Rich Yamarone, Barry Ritholtz, Jim Bianco, Barry Habib, and myself. It has been getting rave reviews, and I trust it will be worthy of your time...
Your Perception Is Your Reality
There’s a very interesting article in The Atlantic this week, called “How Partisans Fool Themselves Into Believing Their Own Spin.” While the author, Alesh Houdek, engages in some spin of his own, he makes some very good points that we should keep in mind not only as we look at the potential effects of a tax increase but as we tackle new ideas and accompanying “facts” in general. And he has pointed us to a very interesting study, or at least it’s interesting for those of us who are fascinated by behavioral psychology and behavioral economics:
We weigh facts and lines of reasoning far more strongly when they favor our own side, and we minimize the importance and validity of the opposition's arguments. That may be appropriate behavior in a formal debate, or when we're trying to sway the opinion of a third party. But to the extent that we internalize these tendencies, they injure our ability to think and see clearly. And if we bring them into the sort of open and honest one-on-one political debates that we'd like to think Americans have with each other, we strain our own credibility and undermine the possibility of reaching an understanding.
A defense attorney presents the best case for his client's innocence in court, but he's realistic with himself about what he believes the truth of the matter is. Too often in political arguments we have drunk our own Kool-Aid.”
A recent report on three psychological studies by professors from the University of California, Irvine confirms this bias, and points out that it's pervasive across a wide range of human situations. Where our moral judgements come into conflict with evidence, we look for ways to dismiss and minimize the evidence:
Quoting from the report:
“While individuals can and do appeal to principle in some cases to support their moral positions, we argue that this is a difficult stance psychologically because it conflicts with well-rehearsed economic intuitions urging that the most rational course of action is the one that produces the most favorable cost-benefit ratio. Our research suggests that people resolve such dilemmas by bringing cost-benefit beliefs into line with moral evaluations, such that the right course of action morally becomes the right course of action practically as well. Study 3 provides experimental confirmation of a pattern implied by both our own and others' correlational research (e.g., Kahan, 2010): People shape their descriptive understanding of the world to fit their prescriptive understanding of it. Our findings contribute to a growing body of research demonstrating that moral evaluations affect non-moral judgments such as assessments of cause (Alicke, 2000; Cushman & Youn g, 2011) intention (Knobe, 2003, 2010), and control (Young & Phillips, 2011). At the broadest level, all these examples represent a tendency, long noted by philosophers, for people to have trouble maintaining clear conceptual boundaries between what is and what ought to be (Davis, 1978; Hume, 1740/1985).”
This next paragraph is critical. Read it twice.
The studies further show that this effect is stronger in well-informed, politically engaged individuals. The more information we have, the higher our propensity to cheat with it. I've been talking to a lot of people on both sides of the election, and the thing I'm often struck by is an inability to find any validity in the opposing side's arguments. By blocking our ability to have meaningful conversations, this effect is actually harming political discourse.
Given that my readers are just about the most well-informed and politically engaged group of people anywhere, we have to make a special effort to think through controversial topics. I make the effort to constantly question my assumptions and to read people I don’t agree with. That is why Outside the Box (which highlights the writing of other analysts and thought leaders and is now published in Friday afternoon) features such a wide variety of thinking. And few things are more controversial than the coming tax increase. So let’s walk through a few ideas now and come to some conclusions independent of our biases.
Growth = Population Growth + Productivity Increases
It would be hard to find someone who does not agree with the proposition that we need more jobs. The dismal unemployment rate is at the forefront of any debate on the future of the economy, and everyone has a plan to stimulate job growth. And while government jobs are “real” jobs, they require taxes from the private sector or borrowing from future growth in order to pay salaries. By definition, then, when we say we want more jobs what we really mean (or should mean) is that we want more private-sector jobs.
Private-sector jobs do not appear by magic; they require someone to produce a good or service that other people will pay for. Typically, that requires putting in place some form of equipment and/or capital goods so that people can produce the new good or service. To do what I do, I need a computer, an internet connection, web servers, editors, production staff, and a coffee maker. While I typically sit alone and write, it takes a horde of people to produce all the goods and services that make it possible for me to run my business. Where would I be without American Airlines? Telephones? Email? I expect 1,000 things to work seamlessly so that I can sit and write my letter and eventually hit the send button and expect it to pop into your inbox.
The same is true for millions of businesses worldwide, both small and large. And while I hope that my own small part of the economy will grow faster than US GDP, the mathematical reality is that we’re all in this together. Individual businesses will fail or succeed on their own, but overall growth is by definition a joint venture. An economy that is growing is an economy that is producing more jobs. To produce more jobs requires an investment of time and materials on the part of individuals and/or businesses. That takes money. Whether it comes from your own savings or those of family or friends, or from a bank or your friendly vulture capitalist (that would be me, when I get the chance), starting and maintaining a business requires capital. In a very real sense, capital is the engine of growth. And whatever manifestation it may take, capital is essentially savings in one form or another.
Let’s do a very quick review. Long-time readers know that there are two, and only two, ways to increase gross domestic product and grow an economy. You can increase your population or you can increase productivity. That’s it. That’s the recipe for the secret sauce that all politicians seek.
Jeremy Grantham (one of my favorite analysts) wrote in his recent client letter:
The demographic inputs peaked around 1970 at nearly 2% a year growth (there are many ways to do these calculations, each yielding slightly different results). They fell to about 1% average growth for the last 30 years and demographic effects are now down to about 0.2% a year increase in man-hours where they are likely to remain until 2050, with possibly a very slight downward bias. Unusually for things economic, these estimates are much more likely than the typical estimates to be quite accurate, for much is derived from the existing population profile and social trends, which, like birth rates, change very slowly. The only variable that is quite likely to jump around unpredictably is the U.S. immigration policy.
Sidebar: This is why I have written that at some point in the future even politicians will realize that the most valuable import we can find is young, educated immigrants. Second would be young immigrants willing to work. The current immigration policy of the US, continued under multiple administrations, is puzzling and pointedly anti-growth. We need to give anyone who gets a degree from a US university a green card with his diploma. And our embassies should be making it easy for the best and brightest to find a way here. And a dozen other things need to be done.
But that is another letter.
Grantham noted that a large part of our productivity growth has come from the increased participation of women in the labor force, an increase that begin to decline in 2000, not coincidentally, he says, with the decrease in average annual GDP growth. Here is a chart of the labor participation rate of women, from the FRED database:
Couple that demographic reality with a declining number of hours worked (which feeds into productivity), and you begin to partially account for and understand why the growth of GDP has been less than 2% for the last 12 years, a far cry from the 3.25% it had been for the previous few hundred years. Throw in a deleveraging economy, and you have even more headwinds to growth. Leverage on the way up helps add to the capital base, but decreasing leverage slows growth. Grantham does his work to suggest that the growth of US GDP will be less than 1% over the next 18 years. I am not so pessimistic, but neither do I think we will attain 3% growth for quite some time to come. Given the current realities, I would be happy with 2%.
Now, let’s talk about capital formation and tax increases. It seems that a number of people agree that taxes should be raised on millionaires. I’ve been on several panels and in numerous conversations where participants adamantly maintained that raising taxes on the “rich” would have no impact on the economy. I want to do a thought experiment with you and let you decide if there will be an impact.
Please note that this is not an argument for or against raising taxes. It may very well be in the common interest to raise taxes from where they are today. Remember the report on psychological bias we looked at briefly at the beginning of this letter. If you start with the assumption that raising taxes is either bad or good and then look for facts to support your belief, you will not help come to an unbiased conclusion.
Let’s start with your typical millionaire individual. For the ease of our math, let’s round off the numbers. The top federal tax rate is 35%, plus Medicare and property taxes, sales taxes, state and local income taxes, school taxes, etc. Depending on whether the individual owns a business, he or she may pay both sides of the Medicare tax.
Let’s assume our millionaire pays 40% “all in” on his $1 million income. That leaves him with $600,000. Note that in some states and cities this could be much closer to $500,000. And some people will pay less. The numbers will change somewhat, but the logic will remain intact. Let’s assume that our intrepid millionaire spends $300,000 maintaining his lifestyle, leaving him with another $300,000 to save and invest. (I’m also assuming he doesn’t have seven kids in private school, but that’s another story.)
Now, let’s raise his taxes by 5%, which is somewhat less than the likely increase in income taxes and Medicare taxes currently being discussed. Clinging gamely to his lifestyle, our millionaire now has $250,000 to save and invest. This still sounds like a lot to most people, and it is. But the economy now has $50,000 less in gross national savings.
Whether his taxes are 45% going to 50% or 55% going to 60% (think NYC), our millionaire will accumulate less capital over time. And that has to make a difference. How can it not?
Whether or not our individual millionaires decide to put her savings into bonds or to plow them back into her personal small businesses or any of a hundred other things she could choose to do with this money is immaterial. In the aggregate, when you add all the millionaires together, there is now less money available for capital formation. To think that their actions will be exactly the same as they would have been with 20% more money is ludicrous. They may still put money back into their businesses or invest in other businesses, but the simple fact is that they have less money to do whatever it is they want to do.
If they cut back on spending in order to maintain their savings and investment portfolios, then the merchants who sold them goods and services will have less. Yes, that money will be spent by the government on other goods and services, and to that extent it will show up in GDP. But to argue that there will be no impact on savings and investment and thus capital formation simply makes no sense.
As I’ve repeatedly written, the preponderance of academic literature suggests that there is a hit to the growth of GDP from raising taxes. That is different from saying that the raison d'être for all taxes should be their effect on GDP growth. Certain taxes (and spending) may very well be worth the resultant lower growth in capital formation and thus GDP. Healthcare comes to mind.
Given the high correlation between the growth of the stock market and the growth of GDP, as investors it behooves us to pay attention to things that affect GDP. At the very least, our long-term expectations for GDP growth should affect our investment decisions. But without knowing the exact amount or nature of the tax increases to come, whether they will be from actually raising rates or from eliminating deductions, it is hard to say what the effect on the economy will be. Not all taxes have the same multiplier. Income taxes seem to have a higher multiplier than consumption taxes, as an example.
That being said, increasing taxes will drag down GDP growth in both the short and long term. The longer-term effect will be a decrease in available capital. That $50,000 that our millionaire does not have this year? Over ten years it becomes $500,000, and even more if the money is well-used. But if those funds cannot be invested in productivity-enhancing tools, services, and businesses, there will be fewer jobs and reduced consumption down the line. There are consequences. As a country, we must decide whether to pay that price.
But for sure, an increase in taxes will lower the savings rate. If it does not, then it will lower consumption. Either is bad for the economy. But let’s focus on capital formation.
Reduced Capital Spending
I want to quote one last section from Grantham’s letter. It is part of his work explaining why he expects less growth over the coming decades than we have seen in the past. He notes the reduced capital spending and capital formation in the developed world. Let me hasten to add that he does not say anything about tax increases, nor does he draw the conclusions I have. What he does speak to is the importance of capital formation and productivity:
Typically I see less significance than others in debt and monetary factors and more in real factors. When someone says that China is building its trains and houses on debt I think, “No, they are built by real people with real bricks, cement, and steel and whatever happens to the debt, these assets will still be there.” (They may fall down but that’s a separate story; you can build a bad high rise with or without debt). So I take the quality and quantity of capital and people very seriously: they are the keys to growth and a healthy economy. A badly trained, badly educated workforce is a problem we will get to, but reduced, abnormally low capital investment, particularly in the U.S., is the current topic. My friend and economic consultant Andrew Smithers in London has a theory deserving much more attention in my opinion, and that is his concept of the “Bonus Culture.” When I was a young analyst, companies like International Paper and International Harvester would drive us all crazy, for just as the supply/demand situation was getting tight and fat profits seemed around the corner, they and their competitors would all build new plants and everyone would drown in excess capacity. The CEOs were all obsessed with market share and would throw capital spending at everything. It might not have been the way to maximize an individual company’s profit but it was great for jobs and growth. Now, in the bonus culture, new capacity is regarded with great suspicion. It tends to lower profitability in the near term and, occasionally these days, exposes the investing company to a raider. It is far safer to hold tight to the money and, when the stock needs a little push, buy some of your own stock back. This is going on today as I write, and on a big scale (approximately $500 billion this year). Do this enough, though, and we will begin to see disappointing top-line revenues and a slower growing general economy, such as we may be seeing right now.
My colleagues have put together Exhibit 5, which shows the long-term history of capital spending for the U.S. (The savings and investment rate has a 25% correlation with long-run GDP growth.) Mostly the data in Exhibit 5 reflects a lower capital spending rate responding to slower growth. The circled area, though, suggests an abnormally depressed level of capital spending, which seems highly likely to be a depressant on future growth: obviously you embed new technologies and new potential productivity more slowly if you have less new equipment. This currently reduced investment level appears to be about 4% below anything that can be explained by the decline in the growth trend. If this decline is proactive, if you will, and not a reflection of earlier declines in the growth rate, then based on longer term correlations it is likely to depress future growth by, conservatively, 0.2% a year.
All the participants in last week’s Post Election Economic Summit were either calling outright for a recession next year or were not optimistic. Count me in the latter camp. It is clear that taxes on every worker will go up, because the “tax holiday” of 2% of the total Social Security payment is going to be removed. That is $1,000 per year for someone making $50,000. This tax cut was put in place because everyone agreed it would stimulate the economy. While no one is talking about it, the effects are just as great in the downward direction when the tax comes back. They just are. The total is about 0.75% of GDP. Given your academic view on tax multipliers, that the total effect can be anywhere from 0.75% to more than 2% of GDP.
Anyone arguing that tax increase has no effect now should have said publicly that cutting that tax would have no effect two years ago. Just saying.
Add in whatever other tax increases or spending cuts will accompany the Social Security tax increase (you can call it what you want), and an economy that is barely growing at 2% could be in for a very slow period. Not the stuff that job growth is made of. Further, businesses will have increased costs under Obamacare. Some costs kick in quicker than others.
ANY further hit from Europe or Japan could call into question global growth. We are an interconnected world, and what happens in those nations will affect us. While I might feel differently if I were a German or Dutch or Finnish voter, those of us in the US should stand up and applaud whenever the eurozone postpones a crisis. At our Summit, Mohamed El-Erian was very clearly worried about the crisis in Europe. (He was on fire. We will post his entire portion of the Summit later this week. I will let you know. You do want to watch it.) Any hit to Europe will likely push the US into recession. It is an uncomfortable place to be when you need Europe not to have a crisis in order for your own economy to keep growing. I keep wondering how long Europe can keep kicking that can. All of which feeds into a theme that Barry Ritholtz brought up. He was more concerned about what he called an “earnings cliff” than a fiscal cliff. And earnings are part and parcel of GDP. We know what happens to earnings in a recession. And to employment and to budget deficits. We have only to look at Europe to see what happens when too much austerity is applied too fast. Slow and steady should be the rule. I am deadly serious about going on a fiscal diet; I just don’t want to try and lose it all at once.
Bismarck, DC, New York, and Europe I will be going to Bismarck, North Dakota this week to speak to the clients of BNC National Bank. I will be speaking on Friday, but Greg Cleveland, the president and CEO of BNC, has graciously offered to take me on a tour of the Bakken oil and gas fields on Thursday. The tour guide for the day will be Loren Kopseng, majority owner of United Energy Corporation and one of the foremost experts on the Bakken. They have chartered a helicopter for the day, and I intend to take notes and report back to you. Maybe there will be a few pictures as well. This is one of the truly great economic stories of the past decade. Shale oil in the US has contributed (by Grantham’s estimate) about 0.3% of growth to GDP, and he expects that to rise to 0.5%. That’s a large chunk of the growth we have recently seen. If we really unleashed the tiger with a proactive energy policy, we could do even more. And natural gas is far kinder to the environment than coal. And then there are the knock-on effects of allowing all sorts of other industries to thrive.
I am taking my middle son, Chad, with me, and he will explore job prospects in Bismarck while I take my tour. He likes the idea of working in the oil fields and seems to think the cold won’t be that bad. I think the oil fields are one place where there will be jobs for quite some time. We’ll see how that works out...
John Mauldin
1b) Yale's Stephen Roach: Loose Monetary Policies Are a Ticking ‘Time Bomb’
Important: Can you afford to Retire?
The Federal Reserve’s low interest rates and open-ended liquidity injections that aim to make sure rock-bottom borrowing costs stay that way are serving as a ticking time bomb for the economy, said Stephen Roach, former chairman of Morgan Stanley Asia and current Yale economist.
The Fed recently announced a third round of quantitative easing (QE) whereby it will buy $40 billion a month in mortgage-backed securities from banks to pump liquidity into the financial system in a way that pushes down interest rates across the broader economy to spur recovery.
The move aims to jolt the economy and lower unemployment rates when slashing benchmark interest rates alone are not enough to spur recovery.
The Fed has rolled out two previous rounds of QE in the last four years, pumping a combined $2.3 trillion into the economy since 2008.
The most recent third round seeks to spark investing and hiring at a time when the country is trying to pay down debts and rebuild savings, and considering that the country faces massive debt burdens and yawning deficits, sooner or later, investors will avoid the United States and its markets and demand for Treasurys will pop and the bond bubble will burst.
“I fear that we have misdiagnosed the sources and causes of the recent financial crisis and we are putting misguided and misdirected policies in place both fiscal and monetary that are setting ourselves up for another crisis,” Roach told Reuters TV.
QE and deficit stimulus spending make sense during times of crisis, but the United States hasn’t been in a crisis for nearly four years now.
While growth is sluggish and unemployment rates remain persistently high, the economy is recovering.
“Is it appropriate to maintain the extremes of crisis to determine policy in the midst of a crummy recovery? I don’t think it is. The advocates of open-ended fiscal and monetary stimulus really are totally inarticulate on the exit strategy — how do we get out of this? What are the conditions that allow us to go back to normal interest rates, to normal budget deficits?” Roach said.
A task force headed by former Sen. Alan Simpson, R-Wyo., and Erskine Bowles, chief of staff under President Bill Clinton, outlined ways to narrow deficits and pay down debts though the Obama administration put it on hold.
Bring it back to debate or at least say why it was abandoned, Roach recommended.
“There’s definitely a formula that can get us out of the quagmire on the fiscal side, and I would say that there is equal pressure, and there should be, on the Federal Reserve to do the same thing with zero interest rates,” Roach said.
“I think zero interest rates and QE are the time bomb that is really ticking.”
Fed officials, meanwhile, are sticking to their guns, arguing loose policies must stay in place until the labor market shows marked improvement.
“Our concern is to make sure our policies aren’t creating problems with market functioning,” Federal Reserve Bank of San Francisco President John William told The Wall Street Journal.
“In terms of how far you can go, I don’t think that we’re anywhere near any kind of limit to that in terms of our current policies, and I expect that to continue well into next year. I don’t think we’re getting close to a constraint in that.”
--------------------------------------------------------------------------------------------------------------------2)Is Abbas About To Join Hamas?
Khaled Abu Toameh - Gatestone Institute,
It now remains to be seen whether Hamas will forgive Abbas for “collaborating” with Israel, and join forces with him.
As of last week, Palestinian Authority President Mahmoud Abbas will think twice before he condemns any rocket or terror attack on Israel.
Alarmed by Hamas's growing popularity among Palestinians, especially in wake of its purported “victory,” Abbas appears to have completely changed his attitude toward the Islamist movement and its terror attacks against Israel.
Abbas's new attitude toward Hamas has prompted some Palestinians to wonder, quite sarcastically, whether he was planning to grow a beard and join the Islamist movement.
They pointed out that this was the same Abbas who, on more than one occasion, had accused Hamas of plotting to assassinate him and topple his regime in the West Bank. They also noted that this was the same Abbas whom Hamas had expelled from the Gaza Strip in the summer of 2007.
Abbas was one of the first Arab leaders to congratulate Hamas on its “victory” over Israel during the recent eight-day confrontation.
Hamas announced that Abbas phoned its prime minister, Ismail Haniyeh, one day after the Egyptian-brokered cease-fire went into effect to “congratulate him on Hamas's victory and offer condolences for the martyrs.”
Abbas's phone call to the Hamas leader did not come as a surprise.
Since the beginning of the Israeli military offensive in the Gaza Strip, Abbas has been begging Hamas to forget about its differences with his Fatah faction and agree to “national unity.”
Until recently, Abbas used to mock Hamas's rockets, calling them “ineffective.” It is not that Abbas was opposed to the idea of launching rockets at Israel; rather, his position was based on the argument that these rockets were not inflicting enough casualties and damage on the Israeli side.
Over the past few years, Abbas had publicly denounced Hamas for providing Israel with an “excuse” to attack the Gaza Strip by launching the “ineffective” rockets at Israeli cities and towns.
But during the last confrontation, Abbas did not utter a word against Hamas and other radical groups in the Gaza Strip.
Instead, he chose to issue strong condemnations against Israel, holding it fully responsible for initiating the violence.
In public statements, Abbas and his top aides in the West Bank accused Israel of perpetrating “war crimes” by targeting “innocent civilians.” They also heaped praise on Hamas and Islamic Jihad for their “steadfastness in the face of Israeli aggression.”
Not once did Abbas and his aides denounce Hamas and Islamic Jihad for firing rockets at Israel. The rockets, from their perspective, were no longer “ineffective” because this time they were extracting a heavy price from Israel.
As soon as the cease-fire went into effect, Abbas's top Fatah officials joined Hamas supporters in the Gaza Strip who took to the streets to celebrate “victory” over Israel.
Zakariya al-Agha, a senior Fatah leader, praised Hamas and Islamic Jihad for launching rockets at Jerusalem and Tel Aviv “until Israel asked for a cease-fire.”
Abbas Zaki, another Fatah official, boasted that Abbas and the Fatah leadership in the West Bank had helped provide “political justification” for the rocket attacks against Israel.
Until the last round of violence, Abbas considered Hamas to be his number one enemy. That view was why his security forces had been waging a relentless crackdown on Hamas supporters in the West Bank.
Obviously, Abbas has now changed his policy and Hamas is no longer a threat to him and his regime. Now he will have to stop arresting — and torturing — Hamas members in the West Bank in the hope that the Islamist movement will forgive him for “collaborating” with Israel.
It now remains to be seen whether Hamas will forgive Abbas for his “sins,” and join forces with him.
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4)----Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt
The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.
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by Col. William Bauer, USMCThe Battling Bastards of Benghazi
We're the Battling Bastards of Benghazi ,
no fame, no glory, no paparazzi.
Just a fiery death in a blazing hell,
defending the country we loved so well.
It wasn't our job, but we answered the call,
fought to the consulate, 'n scaled th' wall.
We pulled twenty countrymen from the jaws of fate,
led them to safety, 'n stood at th' gate.
Just the two of us, 'n foe by th' score,
but we stood fast to bar th' door.
We called for reinforcement, but it was denied,
so we fought, 'n we fought, 'n we fought, 'n we died.
We gave our all for our Uncle Sam,
'n Obama didn't give a damn,
just two dead SEALS, who carried the load,
no thanks to us, we were bumps in the road.
4)----Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt
Hiding the government's liabilities from the public makes it seem that we can tax our way out of mounting deficits. We can't.
By CHRIS COX AND BILL ARCHER
A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.
Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.
A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?
As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. The truly important figures would appear on the federal balance sheet—if the government prepared an accurate one.
But it hasn't. For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.
As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.
The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.
Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees' report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).
As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.
Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets—and bankrupt not only the programs themselves but the entire federal government.
These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.
In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.
When combined with funding the general cash deficits, these multitrillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China's de-emphasis of new investment in U.S. Treasurys in favor of increasing foreign direct investment, and Japan's and Europe's own sovereign-debt challenges.
When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.
Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.
In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation's debt and deficit problems be solved.
Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government's largest financial liabilities in accordance with well-established norms in the private sector. When the new Congress convenes in January, making the numbers clear—and establishing policies that finally address them before it is too late—should be a top order of business.
Mr. Cox, a former chairman of the House Republican Policy Committee and the Securities and Exchange Commission, is president of Bingham Consulting LLC. Mr. Archer, a former chairman of the House Ways & Means Committee, is a senior policy adviser at PricewaterhouseCoopers LLP.---------------------------------------------------------------------------------------------------------------------------------------
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