July 14, 2011

Drifting toward the falls

A friend and faithful reader writes:

"I enjoy your consistently perceptive comments on the budget goings-on, but I wish you had used to illustrate the problem that Obama's "grand bargain" to cut $4 trillion of spending over the next 10 years doesn't begin to address the deficit problem. Assuming the average savings is $0.4 trillion a year (it's not but so what) and that the savings turn out to be what they're forecast to be (they rarely do), we still have to fund an annual deficit of $1.1 trillion or so. The deficit is so large that elimination of the entire military budget wouldn't fix the problem (and I'm not suggesting that the military budget not be significantly cut). The $2.4 trillion package they're now trying to negotiate is even less effective."
These statements are unfortunately true, and I don't disagree at all. In fact, my understanding is that the "$4 trillion dollar deficit reduction" is not actually a subtraction from the amounts of the current budget or future budgets, so that we would actually be spending less now or in the future than we are at present (in nominal terms), but is only a reduction in the anticipated increases in future budgets. Thus, if the future budget deficit is still $1.5 trillion, but it would have been $1.9 trillion without the "cut," that still counts as "$400 billion toward a ten-year total of $4 trillion." Joe Biden was apparently asked by one young GOPer at a recent meeting how much his "$2 trillion plan" would reduce actual federal spending next year, versus current expenditures, and his answer was "$2 billion." These are all just improvised acts in the Theater of the Absurd.

One must learn to speak the language of our slippery politicians. The problem that Congress faces in trying to find something, anywhere, that can actually be cut is that by the time they get around to the "appropriations process," about 67% of the budgeting has occurred automatically, because Congress deems it politically necessary to honor existing commitments to Social Security, Medicare/Medicaid, unemployment, food stamps and interest on the public fraction of the national debt. Thus, even the suggested changes to Social Security and Medicare speak in terms of future "means testing" or raising eligiblity ages, and these ideas tinker around the edges. As the population ages and the rolls of Social Security and Medicare/Medicaid continue to swell, all of the safety net problems are going to get worse.

Not that Congress or the President actually bothers with a "budget." We have not had an actual, signed budget since fiscal year 2009; they're literally making it up as they go along, which, when you think about it, makes sense under the circumstances. When your income is $2 trillion and your expenses are about $3.6 trillion (actually, the newest Monthly Treasury Statement just came out, if you want to take a look: http://www.fms.treas.gov/mts/index.html, and it's the usual horror story - the deficit is now at $1.7 trillion), does it actually make a lot of sense to talk about "allocating your resources?" They're just hanging on and faking it from month to month.

Let's face it, the "plan" all along was for the United States to grow its way out of this mess, and to resume the upward trend line as in previous recoveries; however, that's not happening, so we're stuck with the awful problem of exponential growth in debt matched with precisely no growth in actual wealth; thus, the "yahoos" in the Tea Party who are fighting the debt ceiling raise may be crazy, but it's possible they're crazy only because they're right for the wrong reason, if that makes any sense and I don't see how it does. So to rephrase: I think the real motivation of the Tea Party thinkers is simply an assault on certain aspects of central government of which they (or their financiers, such as the Koch brothers) disapprove, which is why they often cite as examples of runaway Big Government the "EPA," or the Departments of Education and Energy, or the tiny fraction of 1% of federal money that might find its way into sex education. There are, of course, problems with Big Government, but the places to look for them are in the Departments of Defense, Homeland Security, State, Agriculture and the other real money-suckers among the budgetary line items.

Anyway, we continue to drift toward D-Day (Default Day), and the propaganda from our squealing politicos is getting very shrill indeed. President Obama talks about suspending Social Security payments. The guy gets paid, what, 400 grand a year? This is symptomatic of our problems these days: gross incompetence. It so happens that Social Security is one of the federal programs where it's okay to sell debt to continue operating, even after the debt ceiling is hit. The reasons for this are a little technical, but should be well within the ken of a high elected official. Specifically, while it's true that the total of public debt (a little under $10 trillion) and intragovernmental debt (Social Security and Medicare, mainly, currently about $4.5 trillion) cannot exceed $14.3 trillion under the current ceiling, the Treasury can sell public bonds to redeem the intragovernmental bonds on a 1:1 basis; thus, as Column A goes up (public debt), Column B (intragov.) goes down, leaving the total the same, pressed tightly against the debt ceiling. The "redeemed" bonds would allow Social Security to remain solvent for a few years longer even with the existing ceiling. Yet I suppose that one of two things is possible: Obama simply doesn't know this (pathetic), or he doesn't want to mention it because it will reveal exactly what we're doing now to fund the shortfall in Social Security receipts vs. outlays (misleading). Either way, he's picked the worst possible example and has called again into question whether his vaunted "political instincts" are really all that impressive.

I'll leave for another day the obsolete idea of "growing our way" out of debt, another increasingly hopeless conceit of the Beltway and of the academic economists. Meanwhile, the canoe continues to drift toward Niagara, and the paddlers have thrown their oars overboard and decided to engage in fistfights instead. Hey, it's what we pay them for.

July 12, 2011

Further reflections on the budget morass

(Click on graph to open in separate window.) I found yesterday's exercise in going through the fine-grained detail of the budget negotiations somewhat head-clearing, and, after all, isn't it the duty of an American to apprise himself of the actual data as an act of informed citizenship? So much of the daily blather I read and hear about the debt ceiling impasse seems political and "qualitative." Liberal Keynesians such as Paul Krugman and Brad DeLong urge, without doing the basic number-crunching for us, that the government simply borrow and spend more in order to "spur a recovery." For them it's all so obvious. At the other extreme we have the Congressional Tea Party Caucus taking blood oaths and signing mutual suicide pacts assuring that no member will ever vote to raise the debt ceiling.

The above graph is from the research facilities of the St. Louis Federal Reserve Bank (FRED), which maintains all kinds of basic data on the U.S. economy. It's not as if you can't look this stuff up and see for yourself; it's all there. The above graph, of course, misleads by extending the "receipts" figure into years beyond the current fiscal year ending on September 30, and implies that tax revenue will approach $2.4 trillion. The government and its agencies just can't help themselves. Their sinecures depend on sunny optimism. But leaving aside the projection into the unknown, you can see where we've been with a great deal of accuracy.

The graph tells you that the United States has never, in its history, received more than about $2.7 trillion in revenue from all sources, and of course even this number is infected with the usual "on budget/off budget" malarkey, the contribution from phantom trust funds, and the rest. It's not a "quiet" number; it's noisy, as usual. However, let's call it close enough for government work. The maximum number earned in the best of times, in other words, is about $1 trillion less than current federal expenditures.

The surge in income during the early years of the Bush Administration was attributable, obviously, to the housing bubble. The temporary wealth effect of the housing boom pumped a lot of additional money into the American economy. This has been quantified in other studies, and we know that at the peak of the boom (around 2005 or so), as much as $800 billion in additional spending was made possible through the phenomenon of house-as-ATM. This was more money (as direct spending, as opposed to tax breaks) than the federal stimulus program known as ARRA, and it was happening on a yearly basis. Further, the bubble bolstered construction employment and jobs in the financial end of real estate.

That's all over and done with. The dragging effects of the huge debts remain, but the stimulative effects are gone. With high unemployment, falling wages and working hours, a stagnant labor participation rate, and unconscionable skewing of wealth toward the wealthier strata (resulting in the lower half of the American population paying no income tax at all, while the upper 10% pay more than half), the prospects for increased federal government revenue in the near term are very dismal indeed, despite that hopeful little tail upward at the end of the FRED graph (it should really be extended horizontally to take into effect the decrease in FICA taxes which our government, in its moronic way, granted the citizenry at the end of last year in an effort to buy our love).

There are no bubbles on the horizon, not the tech and dot.com boom of the Clinton years nor the housing bubble of the Bush years. No gimmicks, in other words. Congress, meanwhile, as a wholly-owned subsidiary of Big Business, is not going to increase taxes on higher-strata earners, not even to the Clinton-era level of 39.6% as the top marginal rate. It would not solve the problems the U.S. government faces even if Congress took such a measure. Defense could be radically cut, but this entails the problems of "military Keynesianism;" war is a big industry in this country, a major employer, and one of our principal exports. Bombs, planes, missiles, armored vehicles, firearms - we make 'em all, and we sell them all over the world. Defense is the most vested of vested interests. Still, defense will have to be cut substantially, but even cutting it in half does not solve the problems of a $1.5 trillion annual deficit. It won't happen this year, of course; finances will have to get much worse before Congress gets that desperate.

My surmise is that Congress will, in fact, raise the debt ceiling and resume borrowing large sums of money to keep the game going. I base this idea on the simple formula of C. Wright Mills, that those in power always make decisions designed to maintain their power, and if the government defunds itself, it loses power. So various weasel techniques will be used to justify the capitulation to reality, but they have no choice. It's borrow or die. The government simply does not earn enough money to come close to paying its own way. As long as the Treasury can borrow cheap, it will continue to borrow as much as it can, and the national debt will ratchet its way toward $15 trillion, $20 trillion, whatever number the world will allow.

The alternative, after all, is to face reality, and that is just not an "exceptional" thing to do.

July 11, 2011

Poised on the Insolvency Event Horizon

First, it may be helpful to begin with a brief digression on the "Social Security Trust Fund" from the Trustees, with respect to the most recent report on the condition of the Fund:

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.

As you can see, even the very driest of government publications are now thoroughly propagandistic, even on trivial points that don't really matter. They just can't help themselves at this point. Why will the economy strengthen in the years 2012-2014? If so, why has it been getting progressively weaker since 2007?

Never mind. That's not really what I want to emphasize from this report. The key thing to look at here, before the budget calamity is considered in wider focus, is the reference to "trust fund assets" and the "interest" they are paying which act to reduce the deficits between what is being collected from covered workers and what is being paid out. Here's the thing: there are no "trust assets" and they don't "pay" any interest at all. This is the Central Illusion of the Social Security debate. The Trustees are describing accounting entries which will be made, not a source of income in "future years." We don't have to wait till 2037 to "exhaust" the Trust Fund. It's exhausted now, because there's nothing in it. What you see in the report is what you get: the Social Security fund now pays out more in benefits than it receives, full stop.

As a homely analogy, suppose you have a Visa card with a balance of $500 and a minimum payment of $25. When it comes time to pay the statement, will the credit card itself pay the bill, or will you pay the bill from some other source, such as earnings? Correct. Now think about the mountains of IOUs from the Treasury in the Social Security "trust fund," currently totaling about $2.5 trillion. Think of these as the Visa statement, a record of money already spent, in this case by Congress. Will this stack of stationery pay the money to the beneficiaries, or will the Treasury pay it with taxes (earnings) from the general fund or from further borrowing from the public?

Okay, so we're clear so far. The reason for the above exercise will become apparent as we analyze further; it provides a way to think about the discussion of "on budget" interest payments and receipts discussed below.

Social Security is insolvent (unable to pay its own way), and the 78 million Baby Boomers have only begun the process of signing up (the first born-in-1946 cohort became eligible for early S.S. in 2008). Now let's place this sad reality in the context of the overall budget morass, or the skeletal remains of the Federal government's finances over which our learned solons and President are currently in deep contemplation. We can look at the most recently available Monthly Treasury Statement for a rigorous statement of our financial condition, since it contains fairly rational projections of full year fiscal numbers (the fiscal year ends September 30, or a little over two months from now).

The dismal picture is as follows (all figures in billions):

Individual income tax receipts: $956 b
Corporate tax receipts: $198 b
FICA (Soc. Security) $559 b (nota bene: the Trustees of the Social Security Fund must have plotzed when Obama agreed to reduce the amount of FICA taxes paid by workers at the end of last year in one of his grand bargains with the GOP. "Oy vey," the Fund gnomes must have muttered, "what is this shmendrick trying to do to us here? This, a bigger hole he thinks we should have?")
"On budget" interest: $191 b. (nota bene again: this is the phantom money paid by the Trust Fund to the Social Security Fund to keep its head above water. It's not really income, and it should be deducted from the total receipts to determine real Federal cash flow. All this amount represents is an accounting entry to keep score on the "money" in the "trust fund." See above.)

If we add to the above receipts certain other income sources, such as money "paid" by the Federal Reserve to the Treasury to reimburse the Treasury for the coupon interest the Treasury paid to the ...forget it, it doesn't matter. Let's let them have that; we can't take away all their pacifiers. Plus excise taxes and some other stuff, total receipts equal $2,178 billion ($2.178 trillion). However, logically speaking, the $191 billion in "on budget" income from the Fund should be subtracted from the total because it's not real. Offsetting this deduction, we should also subtract, on the outlay side, the amounts "paid" by the Treasury to the Fund from the "gross" interest expense of $430 billion (we'll use the same $191 billion) because, again, this is simply an accounting entry and not the payment of real money. The "public debt" of roughly $10 trillion is carried at an average rate of about 2.5% per annum, very good by historical standards, so that the remaining $250 billion per year is roughly in line with the deduction of $191 billion in phantom money from both income and expenses. (The historical average is over 5%; what would this "normalization" do to the Federal budget? You don't want to know.)

This leaves us with $1.987 trillion real dollars to run the federal government. Current projections call for $740 billion for the Pentagon's basic expenses and to fund the 9 or 10 wars we've got going at present. Health & Human Services needs $909 billion for Medicare, Medicaid and its other core health services. Social Security is in for $801 billion. And the balance of the "gross interest" debt service (after the adjustments above) is $239 billion. These fundamental outlays of the "insurance company with an army" (as the Federal government, with reason, is called), total $2.689 trillion, or about (almost exactly) $700 billion more than the government's true cash intake, net of mirages and accounting games. There is no cash for anything else the government does, for any other agency, for the court system, for research, for the interstate highway system or air traffic control, for Homeland Security. Nada, squat, zero. Bupkis mit kuduchas, as the abovementioned Gnomes would say. The difference between the total outlays of about $3.6 trillion (net of phantom interest paid to Trust Funds) and $1.987 trillion is all paid with debt, year in and year out. And thus, Congress seeks the right to borrow more, in the hope, based on something, that things will just turn around, that the aging, displaced, marginalized, offshoring-hammered work force, which currently receives more than 22% of its "income" from government transfer payments, will find it within itself to just step up and start paying lots and lots of taxes from all their new income, will put off retiring for a few decades, and all those jobs we sent to China, Vietnam, Mexico - hell, they'll all just come back, because we need them to. This sort of "plan" makes the effort to find a rainbow-shitting unicorn seem practical by comparison.

This picture is the very image of an insolvent nation. It took us a while to get here (about 30 years), but now that we're here...well, now we're here. This is the way things really are. Congress can raise the debt ceiling, or not, and it will only make a difference in terms of how long we hang on. Obama probably realized all of this a couple of years go, and that's why he's focused primarily on his golf game. Something that he can really take with him after the Presidential years. A nice memory among the ruins.

July 10, 2011

The Mad Tea Party

Reflecting on yesterday's outburst: I suppose what is roiling my usual sunny disposition is this gnawing sense that the American political scene is reaching a dangerous inflection point, a fork in the road where the move toward extremism may go entirely mainstream and sweep all before it, and one of the principal enablers of this dangerous trend is the Christian Right.

Student of history that I try to be (to avoid the fate which Santayana said awaited those who ignore the lessons of history), I find it useful to recall that Hitler's rise to power did not proceed in an uninterrupted straight line. Between the Beer Hall Putsch of the early 1920's and the burning of the Reichstag, a full decade passed during which Hitler languished in jail, writing his hateful manifesto Mein Kampf, resumed life as a free man, and began organizing in earnest. He was helped along enormously by the desperate economic times in Germany following the end of World War I, the hyperinflation of the Weimar Republic, and finally by the onset of the Great Depression. Germany, once such a proud and powerful nation, was reduced to penury by all these insults.

Similarly, the United States is itself in marked decline, and the rise of extremist religiosity, which is virtually unique among Western First World nations (it is unique, in fact), has been given impetus by these trends. The American middle class is going the way of the American buffalo at this point. Not a single net job has been added to the American payrolls since December, 2000, the last month of Clinton's second term: there were 132 million jobs then, and 131 million jobs now. During that time the American population grew by 28 million people. Jobs came and went during the Aughts of the Bush years, but they were the jobs attached to the housing bubble, construction, financing, buying and selling, and all the consumer buying made possible by the house-as-ATM phenomenon. The bubble burst and we're back to where we were a long time ago. Despite the implausibility of a 9.2% unemployment rate in the face of a 28 million person increase in population with no jobs to accommodate the growth, government propaganda claims this is the case in an effort to quell domestic rebellion. In point of fact, any practical measure of true unemployment would have to exceed 20%, as John Williams at ShadowStats consistently reminds us. This is the unemployment of the Great Depression, not the Great Recession.

Add to the massive ranks of the unemployed the large numbers of currently enlisted soldiers in the bloated military. Remember the "recruiting difficulties" of the Bush years? Where did those go? They went away with the pop of the housing bubble. Younger people coming out of high school, or a few years of college, can either move back in with their parents or sign up and fight in one of the many foreign wars the United States is currently running to provide an opportunity "to serve their country."

Thus, when the federal deficit problems go supercritical, a number of bad things are going to happen all at once. Social Security, which is already running at a deficit (7 years ahead of schedule), and Medicare are going to wobble on their foundations, and the younger generations, who can't even find jobs, are going to have no sympathy for participating in a Ponzi scheme which will never benefit them. So the entitlement programs will collapse. With general government funding in steady decline, the federal government is going to have to scale back on its foreign wars and on the defense establishment generally, which means that our Christianized fighting forces are going to come home, trained in, and inured to, violence.

Meanwhile, the political movement in ascendancy in the USA is the one most closely aligned with the Christian Right, the Tea Party. A Tea Party Caucus of 60 members in the House was formed about a year ago, with Michele Bachmann as the Chair. Michele really has it all: the Germanic name; the utter, implacable confidence that she is right (so typical of the religion-fueled); the intolerance for abortion, stem cell research and gay rights; the serene belief that global warming is a hoax; the desire to institute Intelligent Design classes in public schools "along with" the teaching of evolution (the latter soon to be phased out, of course); the obscurantist, know-nothing confidence of the mid-range I.Q. powered by her awesome belief that she is doing God's work.

Michele is running third behind noted department store mannequin Mitt Romney and the Governor of Texas, Rick Perry, but that will change. If you add up the numbers for Michele Bachmann and Sarah Palin you will see that they exceed those for either Romney or Perry, and the Tea Party vote is going to go for one of the two women, not both. Mitt the Mormon simply belongs to the wrong cult, and Perry will fade because, crazy as he is, he's just not crazy enough for our day and time. The Republicans want a True Believer, and Michele has the wind at her back. Wall Street won't like her (she's too uncontrollable, unlike Barack Obama), but the Koch brothers can easily fill in the gap.

I suppose that Barack Obama plays the role of Paul von Hindenburg in all of this, the hapless, well-intentioned place holder just trying to go along to get along, but who makes possible, through his very inertia, his displacement by a zealot. The Germans convinced him to run for President in 1932, as the only man capable of defeating Hitler, and Hindenburg succeeded; but then in an act of inappropriate "bipartisanship," he appointed Hitler Chancellor, which is the only opening the Little Corporal needed. Obama, through his mild, accommodating deference to zealots with their own agenda, has given away a great deal of his own power. It remains to be seen whether he can accomplish Hindenburg's feat of defeating the upstart.

Thus, my strident tone yesterday has to do with this sense that it is the irrationality of Christianity which makes possible all of this regressive movement, which is something that Sam Harris writes about in Letter to A Christian Nation. Christians might have what they perceive as the best intentions in the world, they might be "progressive" Christians like Jim Wallis (or Barack Obama), but they give cover and credibility to the extremists among them because they're talking the same language and playing the same anti-intellectual game, ceding the right to their own opinions to a bunch of dumb rules laid down by some superstitious, old Hebrew men a few thousand years ago, as when Barack Obama pretends to oppose gay marriage because of his "Christian beliefs." (And all this time I thought he was the Chief Constitutional Officer in charge of faithfully executing the laws of the land, including the First Amendment.)

And just to finish with the profound, humble recognition that nothing I say or write will do the slightest bit of good. This is building a sand castle against an incoming tidal wave.