u.s. debt & deficits: a budgetary crisis dr. dennis foster 8/22/2012

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U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

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Page 1: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

U.S. Debt & Deficits:A Budgetary Crisis

Dr. Dennis Foster 8/22/2012

Page 2: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part I. The Problem.

Debt:Debt:

Page 3: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

DeficitsDeficits::

Part I. The Problem.

Page 4: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Context? As % of Context? As % of GDP.GDP.

Part I. The Problem.

Page 5: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part I. The Problem.

Page 6: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

The good news is that the

people who are really going to be mad about this have not

even been born yet.

Part I. The Problem. Unfunded

federal “liabilities”

= $60+trillion

Page 7: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Ever hear of business Ever hear of business cycles?cycles?

Part I. The Problem.

Page 8: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part II. What is to be done?

• The “fiscal cliff” scenario– Bush tax cuts expire– Expand AMT– Reduce Medicare reimbursements– Sequestration spending cuts– Expiration of some unemployment compesation– Some “Obamacare” taxes kick in

– Net effect … ~$600 billion decrease in deficit.

– … and decrease growth 0.5%. Another recession?

Page 9: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part II. What is to be done?

• Simpson-Bowles– Spending cuts ($200 b/year)– Tax increases ($100 b/year)– “Public option” in Obamacare to costs– Reduce entitlements

• farm subsidies, student loans

– Rearrange Social Security• raise taxes, raise retirement age

– Expect debt cut by $4 T. over 10 years– … means the debt will grow by $6+/- trillion!

Page 10: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part II. What is to be done?

• Ryan Budget– Target spending to 20% of GDP.

• details on cuts …

– Target taxes at 19% of GDP.– Retool Medicare as central feature

– CBO figures budget balanced in 2030 (!)– … debt grows until then, but shrinks as

%GDP– … assuming no recessions for next 18

years.

Page 11: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part II. What is to be done?

• Bush - Privatize Social Security

• Gramm-Rudman-Hollings

• Grace Commission

• Obama - 2011 SOTU

Page 12: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part II. What is to be done?

• What does the budget look like?

Page 13: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part II. What is to be done?

• Where does the money come from?

Page 14: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part III. Why little/nothing will get done.

Page 15: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Lessons from Public Choice Theory

• The study of collective choice using standard economic assumptions - people are rational and self-interested; incentives matter.– Politicians want to win elections.– To win, you must cater to various voter blocs.– To be successful, you must trade votes.

• legal vs. illegal bribes

– To minimize opposition, separate spending and tax decisions.

– Concentrate benefits; spread costs.• exception - tax the rich (rhetorically)

– Rhetoric is important.– Embrace the long run, but promote the short run.– The knowledge problem made manifest.

Part III. Why little/nothing will get done.

Page 16: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part III. Why little/nothing will get done. Lessons from Public Choice

Theory• What should we expect from the budget “crisis?”

– Politicians will claim disaster looms, or not.– Politicians will choose to do as little as possible.

• even if events catch up with their choices; Greece …

– Politicians will claim to have solved problems, when they haven’t.

• What will happen?– A “sustainable” path will be found; it won’t be.– At the next recession, the magnitudes will be much

worse.– more “European-like”

– This may/may not follow a serious inflation problem.– At the time of crisis, we will have to accept pain.

Page 17: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Part IV. Thinking outside the box.

The 19% SolutionThe 19% Solution

Page 18: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

A Balanced Budget AmendmentA Balanced Budget Amendment

Part IV. Thinking outside the box.

Page 19: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Ron Paul - Would you opt out?

• Pay some low rate . . . 10%• Take no government (fed’l) assistance.

Gary Johnson - Balance now.

• Cut subsidies & earmarks.• Reform entitlements.

• block grants

Part IV. Thinking outside the box.

Page 20: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Rethink the role of government

• Recognize that government is crude, incapable,inefficient, wasteful, corrupt, immoral, unjust.

• Adopt the notion that government should be as small as possible and as decentralized as possible.

• Allow people to solve their problems voluntarily in an environment of property rights.

• Embrace the free market as a mechanism that promotes diversity, mutual respect, individuality, and as the ultimate expression of democratic values.

Part V. In the long run …

Page 21: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

http://www.usdebtclock.org/ [8/16/2012]

Page 22: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Sources• U.S. Treasury data on debt:

http://www.treasurydirect.gov/NP/BPDLogin?application=np

• St. Louis Fed FRED data base:http://research.stlouisfed.org/fred2/

• Public versus Gross debt:http://en.wikipedia.org/wiki/United_States_public_debthttp://en.wikipedia.org/wiki/File:Holders_of_the_National_Debt_of_the_United_States.gif

http://www.treasurydirect.gov/NP/BPDLogin?application=nphttp://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2011:02:19-gross_vs_net_government_debt_--_a_tedious_topic_with_important_practical_consequences

• Components of government budget:http://useconomy.about.com/od/fiscalpolicy/tp/US_Federal_Budget.htmhttp://en.wikipedia.org/wiki/United_States_federal_budget

• Gross Domestic Product information and data:http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

• Debt data:http://www.fms.treas.gov/finrep11/citizenguide/fr_citizen_guide.html

• Debt and deficits as a percent of GDP:http://www.npr.org/templates/story/story.php?storyId=112339032

Page 23: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Sources• The “fiscal cliff:”

http://www.convergentwealth.com/dollars-and-sense/shadow-fiscal-cliffhttp://en.wikipedia.org/wiki/United_States_federal_budget

• Simpson-Bowles:http://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform

http://www.bloomberg.com/news/2012-06-14/in-praise-still-and-again-of-simpson-bowles.html

• Ryan budget:http://en.wikipedia.org/wiki/The_Path_to_Prosperityhttp://blogs.wsj.com/washwire/2012/08/11/what-is-the-ryan-budget/

• Debate on Social Security:http://en.wikipedia.org/wiki/Social_Security_debate_in_the_United_Stateshttp://www.npr.org/templates/story/story.php?storyId=4164384

• Grace Commission on government waste:http://en.wikipedia.org/wiki/The_Grace_Commissionhttp://www.nationalaffairs.com/doclib/20060406_issue_078_article_5.pdf

• Senate Republicans’ Balanced Budget Amendment:http://cnsnews.com/news/article/senate-gop-unites-behind-strong-balanced-budget-amendment

• The CAP Act:http://www.corker.senate.gov/public/index.cfm?p=the-cap-act

Page 24: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

Sources• Gary Johnson on the debt and deficits:

http://www.garyjohnson2012.com/issues/spending-and-the-deficit

• The 19% solution:http://reason.com/archives/2011/02/14/the-19-percent-solution

• Gramm-Rudman-Hollings:http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Hollings_Balanced_Budget_Act

• John Stossel interviews Ron Paul on his “opt out” idea:http://www.youtube.com/watch?v=ZgIY4IxBSXM

Page 25: U.S. Debt & Deficits: A Budgetary Crisis Dr. Dennis Foster 8/22/2012

U.S. Debt & Deficits:A Budgetary Crisis

Dr. Dennis Foster 8/22/2012