News How will the looming fiscal cliff impact the US economy and job market?

[SixNein]

you forgot to mention it'll bring about world peace...

do you have sources for any of those claims?

Honestly, this should be just common sense...

But...

On prevention:

Primary preventive measures in a clinical setting are those provided to individuals to prevent the onset of a targeted condition (for example, the routine immunization of healthy children), whereas secondary preventive measures identify and treat asymptomatic persons who have already developed risk factors or preclinical disease but in whom the condition has not become clinically apparent (for example, screening for diabetes or colon cancer).

http://www.uspreventiveservicestaskforce.org/uspstf08/methods/procmanual.pdf

For example, here is a list of vaccinations of preventable diseases:
http://www.cdc.gov/vaccines/vpd-vac/

Something as simple as oral checkups can go a long way. For example,
http://www.telegraph.co.uk/health/healthnews/8979191/Bad-dental-health-can-lead-to-pneumonia-Yale-study-suggests.html

As far as national security, have you ever stopped to think about the prospects of a bio-terror attack?

In the area of patient access to health care, more challenging dilemmas arise. Strong ethical reasons have long been recognized as supporting universal access to a decent minimal set of health care services,19 yet our nation has been unable or unwilling to accomplish this.20 Perhaps if policymakers understand that inadequate access to care poses a threat to national security, progress can be made.21,22 In the United States, more than 40 million Americans lack health insurance, and this number is rising.23,24 Although some uninsured individuals use emergency rooms to obtain care when they are acutely ill, many of the uninsured and underinsured avoid the health care system for as long as possible.20 Some have argued that bioterror-related illnesses are so severe that anyone affected would surely seek care.25 But uninsured patients discriminate poorly between appropriate and inappropriate care and tend to avoid both equally.26 Numerous studies demonstrate that the uninsured are more likely to present in an advanced stage of illness, and many die without ever being evaluated

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1448404/


Explanation of participation rates in the economy:
http://en.wikipedia.org/wiki/Labor_force

 

[russ_watters]

Might I ask why not? The US spends 60% more today than what it spent at the height of the Reagan defense build up in the cold war (constant dollars)

The pending defense cuts would be on the order of $40 billion / year for ten years, against the spending of ~800B. Is that drastic?

Does that include and/or is the difference based on the two wars? If I remember correctly, one of Obama's spending cutting claims was based on the winding-down of the wars. I'd like to see it cut by perhaps a third from 800B but as with Bob I have no confidence whatsoever in Congress's ability to make smart cuts. Defense spending is in many ways the largest boondoggle we have.

 

[BobG]

One revenue increaser: http://finance.fortune.cnn.com/2012/11/27/charitable-deduction-reform/?hpt=po_c2 . Not eliminate them entirely. Just 'reform' the tax deductions one gets for tax deductions.

Romney suggested something similar, except his proposal was to cap deductions, period. That would have an inordinate effect on charitable organizations.

And Simpson-Bowles also made a very similar proposal.

You could probably raise about $10 billion/year without affecting donations at all. Or raise more, but then have to address how much of a decrease in charitable donations the country wants to accept (for example, you could probably raise $25 billion with a side effect of reducing donations by around $10 billion).

Obviously, one 'reform' doesn't solve the deficit, but if there is talk of reforming tax deductions, reforming them, and only some of them, is better than eliminating all of them (including mortgage deductions, college deductions, etc).

 

[Astronuc]

or raise revenue 10% and cut expenses 20%,

or raise revenue 20% and cut expenses 10%,

or ?

Examples based on FY12/FY13 numbers

                                                 numbers in $trillion
                                      %revenue increase/%expenditure decrease
(enacted FY12)                 10%/-20%  20%/-10%  20%/-20%   10%/-30%  20%/-30%
revenue      $2.469 trillion    2.7159    2.9628    2.9628     2.7159    2.9628
expend.      $3.796 trillion    3.0368    3.4164    3.0368     2.6572    2.6572

Balance     -$1.327 trillion   -0.3209   -0.4536   -0.0740     0.0587    0.3056

                                   /%expenditure decrease
(requested)                       /-10%     /-20%     /-30%
revenue      $2.902 trillion    2.9020    2.9020    2.9020
expend.      $3.803 trillion    3.4227    3.0424    2.6621

Balance     -$0.901 trillion   -0.5207   -0.1394    0.2399

http://en.wikipedia.org/wiki/2012_United_States_federal_budget
http://en.wikipedia.org/wiki/2013_United_States_federal_budget

Pardon the quick and unverified numbers from Wikipedia.

So let's bite the bullet and adopt austerity measures for the next several decades.

At $300 billion surplus, we can pay down $16 trillion of debt in 53 years.

 

[SixNein]

I have no confidence whatsoever in Congress's ability to make smart cuts.

I agree with you here. One of the reasons that I distrust congress' ability to do anything is due to partisanship. Politics is trumping economics way too often in congress and throughout the world. The global economy is very unstable. The financial system is very unstable. I don't think it would take much at all to push the world back into a depression. Asia looks like a bubble, and Europe looks like a black hole.

I don't think people are fully connecting the dots between government spending and GDP. Moreover, I rarely hear anyone talk about multipliers on our government spending. If we make big cuts to things with high multipliers, we may very well live to regret it as Europe is probably regretting their methods of austerity (which was way less than we are talking about with our fiscal cliff). We need to think about these programs from a pure economic viewpoint instead of an ideological one.

Congress needs to make cuts, reform both health-care and foreign policy, increase taxes, eliminate loopholes, and yes put some serious stimulus spending on infrastructure.

 

[mheslep]

Does that include and/or is the difference based on the two wars? If I remember correctly, one of Obama's spending cutting claims was based on the winding-down of the wars. ...

I'm not sure from that source. The breakdown is here by programs, troop spending, operation & maintenance, but I'm not sure if Afghanistan spending included therein.

 

[mheslep]

or raise revenue 10% and cut expenses 20%,

or raise revenue 20% and cut expenses 10%,

or ?

Or, as proposed today by Geithner, the US gets the revenue increase of ~10% and on the spending side, zero. A $50B spending stimulus *increase* was proposed instead.

WASHINGTON — Treasury Secretary Timothy F. Geithner presented the House speaker, John A. Boehner, a detailed proposal on Thursday to avert the year-end fiscal crisis with $1.6 trillion in tax increases over 10 years, $50 billion in immediate stimulus spending, home mortgage refinancing and a permanent end to Congressional control over statutory borrowing limits.
...
In exchange for locking in the $1.6 trillion in added revenues, President Obama embraced the goal of finding $400 billion in savings from Medicare and other social programs to be worked out next year, with no guarantees.

 

[russ_watters]

Or, as proposed today by Geithner, the US gets the revenue increase of ~10% and on the spending side, zero. A $50B spending stimulus *increase* was proposed instead.

In exchange for locking in the $1.6 trillion in added revenues, President Obama embraced the goal of finding $400 billion in savings from Medicare and other social programs to be worked out next year, with no guarantees.

I trust that Obama will try just as hard to fulfill that promise next year as he has this year.

Or perhaps the law can be written in such a way as to clarify that "next year" means that the spending cuts are always a year away. At least that will enable the CBO to better take into account that they aren't ever going to happen.

 

[Astronuc]

Or, as proposed today by Geithner, the US gets the revenue increase of ~10% and on the spending side, zero. A $50B spending stimulus *increase* was proposed instead.

Well, I see from FY12 and FY13, that the requested revenue (tax receipts?) is increased from $2.469 trillion (enacted) to $2.902 trillion (requested), or approximately a 18% increase, yet the expenditures are projected to be about the same, or ~$3.8 trillion.

Of course 'next' year probably means next fiscal year FY2014, which begins October 1, which effectively means 2014.

 

[Borg]

The rhetoric coming from both sides this week sounds a lot like last year. I wonder what the odds are of them just punting the problem out another year again.

 

[mheslep]

The rhetoric coming from both sides this week sounds a lot like last year. I wonder what the odds are of them just punting the problem out another year again.

To my recollection, higher tax revenues were not on table last time. This time they clearly are, articulated in public. Spending cuts have not been put on the table in public for the Jan 1 fiscal cliff. None. Spending *increases* were proposed instead yesterday.

 

[mheslep]

Well, I see from FY12 and FY13, that the requested revenue (tax receipts?) is increased from $2.469 trillion (enacted) to $2.902 trillion (requested), or approximately a 18% increase, yet the expenditures are projected to be about the same, or ~$3.8 trillion.

Of course 'next' year probably means next fiscal year FY2014, which begins October 1, which effectively means 2014.

That Wiki revenue projection from the US budget includes a projection about what the future economy, as budget revenue projects do, so you can't disambiguate tax increases directly from that aggregated number.

 

[Astronuc]

That Wiki revenue projection from the US budget includes a projection about what the future economy, as budget revenue projects do, so you can't disambiguate tax increases directly from that aggregated number.

I wasn't asserting anything about taxes. Revenue could be from royalties from resources on federal land. However, miscillaneous sources and customs duties are only about 5% of revenue. The rest are taxes.

http://nationalpriorities.org/budget-basics/federal-budget-101/revenues/

While the official tax rate for most corporations is 35 percent, the effective tax rate—that’s the percentage of profits a corporation actually pays in taxes—varies enormously from one corporation to the next.5 That variation is the result of incredible complexity in the tax code as well as corporations’ varying exploitation of “loopholes” to avoid tax liability. Loopholes refer to provisions in the tax code that exempt certain activities from regular taxation. For example, multinational corporations can allocate profits to overseas operations and reduce their tax liability by doing so.

. . . .

There are numerous legal tax shelters the small businesses can use to reduce tax liability.

Meanwhile - a side story - Is Puerto Rico the Greece of the Caribbean?
http://finance.yahoo.com/blogs/daily-ticker/puerto-rico-greece-caribbean-141121081.html

Corporations have been granted favorable federal tax rules, e.g., exemptions or reductions for locating/operating in PR.

Interesting resource - https://www.jct.gov/publications.html

and somewhat relevant (wrt an agreement) - http://news.yahoo.com/very-different-lame-duck-lessons-2010-130055187--abc-news-politics.html

 

[mheslep]

I wasn't asserting anything about taxes. Revenue could be from royalties from resources on federal land. However, miscillaneous sources and customs duties are only about 5% of revenue. The rest are taxes.

...

I was mainly interested in pursuing the earlier suggestion of

or raise revenue 10% and cut expenses 20%,

which I find reasonable though I think the ratio should be at least three to one.

There seems to be some agreement on some revenue increases, but none on the expenses side. That is, not only are there no new expense cuts on the table for this year from the White House despite frequent use of the term 'balance'. The White House is instead proposing new [/I ]spending - $150B over three years w/ $50B in this first year.

 

[Astronuc]

I could swear I posted a response earlier today.

Anyway, I think the numbers warrant a reduction of 30% in expenditures over the current requested, with taxes (or revenue) enacted where they are. That would mean a severe reduction in government programs, including social security, Medicare and Medicaid, and the defense budget.

In the meantime, we would need to put on the order of 8 to 10 million folks to work doing something productive, and earning an income between $50K and $100K per year. Folks earning less than $50K don't pay much if any taxes, particularly if they are supporting families.

 

[SixNein]

I could swear I posted a response earlier today.

Anyway, I think the numbers warrant a reduction of 30% in expenditures over the current requested, with taxes (or revenue) enacted where they are. That would mean a severe reduction in government programs, including social security, Medicare and Medicaid, and the defense budget.

In the meantime, we would need to put on the order of 8 to 10 million folks to work doing something productive, and earning an income between $50K and $100K per year. Folks earning less than $50K don't pay much if any taxes, particularly if they are supporting families.

Do you not think it would be reasonable to take some of the money saved through cuts and stimulate through infrastructure spending?

I'm kinda cautious about Austerity. A big Austerity program right now could rape our economy. We are in a liquidity trap with interest rates at 0 which means the central bank is going to have trouble manhandling an austerity program. So we can't exactly count on the Fed to smooth everything over. And People will invest less now due to expected future cuts. The more severe those cuts are, the more blow-back we'll see in investment especially with programs with a fairly high multiplier effect.

I don't know if people understand what I mean by the multiplier effect. So I'm going to explain it real quick just in case.

Suppose the government spends 100 dollars. A person receives 100 dollars and saves 10 from the government. The rest is spent which becomes income for the next person. The next person receives the 90 dollars, saves 10, spends 80. And on and on and on. This creates a multiplier effect. So every dollar the government spends will usually create much more than a dollar in terms of GDP.

Tax cuts also have multiplying effects; however, it's not typically as strong as government spending. Highest income bracket usually has a fairly low multiplier while the lowest bracket usually has the highest multiplier.

The point being here that Austerity (especially during a liquidity trap) is not as simple or safe as some seem to think. Just because you cut 100 billion out of the deficit does not mean your budget will be 100 billion closer to black. These multiplier effects will tend to shrink the tax base; as a result, tax revenue will decline. So cutting spending does not go dollar for dollar towards a deficit. In addition, the federal budget could trigger more cuts at the state level adding to the multiplier effect. In a basic nutshell, Austerity comes with its own set of risks especially in the middle of a liquidity trap. And I don't understand why people aren't discussing them when they cough them up frequently for stimulus spending. We are only growing at around 2%, so we don't have a lot of wiggle room for mistakes.

 

[Astronuc]

Well, we could distribute the debt liability according to net wealth and income. The treasury could send out a statement with a list of options for a payment schedule - 1 yr, 2 yr, 5 yr, 10 yr, . . . .

 

[SixNein]

Well, we could distribute the debt liability according to net wealth and income. The treasury could send out a statement with a list of options for a payment schedule - 1 yr, 2 yr, 5 yr, 10 yr, . . . .

Congress needs to plan everything around multipliers and not ideology. I'd raise taxes on people with the lowest multipliers, make reforms to control growth rates on future spending with programs like medicare and military, and stimulate the economy through investments in infrastructure with some of the savings. The infrastructure will expand the tax base and should provide a source of long term revenue for the government (it's what 2 trillion behind now?).

If we just ignore multipliers and allow our infrastructure to continue to degrade, we are going to severely damage our economy. We can't run a top economy on a 3rd world infrastructure. The risk here is that we end up in a nasty spiral that is very hard to pull out.

 

[SixNein]

Congress needs to plan everything around multipliers and not ideology. I'd raise taxes on people with the lowest multipliers, make reforms to control growth rates on future spending with programs like medicare and military, and stimulate the economy through investments in infrastructure with some of the savings. The infrastructure will expand the tax base and should provide a source of long term revenue for the government (it's what 2 trillion behind now?).

If we just ignore multipliers and allow our infrastructure to continue to degrade, we are going to severely damage our economy. We can't run a top economy on a 3rd world infrastructure. The risk here is that we end up in a nasty spiral that is very hard to pull out.

On second thought, I think congress needs to pass an infrastructure stimulus bill now. I think it's just too dangerous to do Austerity right in the middle of a liquidity trap. Congress instead needs to focus on getting the US to full employment so the interest rates start lifting. At that point, the US needs to follow up with Austerity, and the central bank can then smooth things out so that it doesn't do too much harm to the economy.

 

[Oltz]

SixNein this is one of the rare times I agree with you in a way

The only increased spending I would accept would be infrastructure roads/bridges/dams water/sewer/gas/power line work is so lacking we are due for some major repair that state and local governments just have not been prudent enough to undertake over the last 30 years.

But I would achieve that by ~10% increase in revenue ~30% cut in spending across all programs and redirect 15% of that to infrastructure projects with the caveat that no funding goes to new projects all of it goes to repair/replace/maintain projects with full bidding and distributed to each representative district to eliminate the desire for pet projects.

No high speed rail until we get what needs fixed taken care of and every district in the country needs work giving it to the state governments will only see the "city" issues fixed leaving dams and distribution lines in the rural areas untouched.

I would run this program and those cuts for at least 5 years but would push for 10.

 

[SixNein]

SixNein this is one of the rare times I agree with you in a way

The only increased spending I would accept would be infrastructure roads/bridges/dams water/sewer/gas/power line work is so lacking we are due for some major repair that state and local governments just have not been prudent enough to undertake over the last 30 years.

But I would achieve that by ~10% increase in revenue ~30% cut in spending across all programs and redirect 15% of that to infrastructure projects with the caveat that no funding goes to new projects all of it goes to repair/replace/maintain projects with full bidding and distributed to each representative district to eliminate the desire for pet projects.

No high speed rail until we get what needs fixed taken care of and every district in the country needs work giving it to the state governments will only see the "city" issues fixed leaving dams and distribution lines in the rural areas untouched.

I would run this program and those cuts for at least 5 years but would push for 10.

Well I think the sequencing of these events needs to be thought about very carefully. Does it make sense to do Austerity in the middle of a liquidity trap? The fed cannot get us to full employment nor can it protect us from shocks to the market with interest rates stuck at 0.

So why not try to piggyback the economy off of an infrastructure spending bill while interest rates are so low? It's not as if we can simply afford to ignore infrastructure forever.

If the infrastructure bill worked, it would start bringing the economy back to full employment; as a result, interest rates would rise and get the banks out of the liquidity trap. At that point and time, Austerity would be less risky than it is today. And I totally agree with you, we need our infrastructure upgraded without leakages to pet projects.

 

[Astronuc]

In the plan, Republicans offer a total of $2.2 trillion in deficit reduction over the next decade. That would give lawmakers "ample" savings to off-set $1.2 trillion in automatic cuts set to begin to take effect Jan. 2, 2013. Senior Republican aides said the proposal does not explicitly include an offer to address the standoff over whether the president or Congress should have power over debt limit increases.
. . . .
The offer also proposes $600 billion in health savings, $300 billion in additional mandatory savings, $300 billion in discretionary spending cuts, and $200 billion by updating the formula by which the Consumer Price Index is calculated, which would affect all sorts of federal programs from Social Security to federal pensions.
. . . .

http://news.yahoo.com/boehner-makes-fiscal-cliff-counter-offer-201946665--abc-news-politics.html

Only $2.2trillion over 10 years? In other words, we still have a deficit and increasing debt. And when ten years go by, they'll still be talking about a deficit? And the debt will be $20+ trillion? And the interest on the debt will be $400+ billion/yr, or perhap $500+ billion/yr?

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

http://www.foxnews.com/politics/201...unting-firm-us-debt-crisis-bigger-than-think/

That's because interest payments add a whole new level of fiscal pain to the country's debt problem. Interest payments on the national debt alone, it noted, are expected to total some $4.2 trillion over the next decade.

Here's a different projection - http://money.cnn.com/2012/03/05/news/economy/national-debt-interest/index.htm

The U.S. government’s interest expense fell to the lowest in seven years as yields on Treasury debt dropped to records even as debt soared beyond $16 trillion for the first time, aided by a one-time accounting change.
. . . .
The fiscal 2012 interest bill was reduced by a change in Department of Defense accounting methods for market-based securities, a one-time adjustment of $75 billion for the month of July. Without the adjustment, the interest bill would have been the lowest since $414 billion in fiscal 2010.
. . . .

http://www.businessweek.com/news/2012-10-04/u-dot-s-dot-interest-cost-falls-to-lowest-since-2005-as-debt-soars

 

[Galteeth]

I'm all for the fiscal cliff. Let people finally start to take the problem seriously. I'd rather have a bad recession/depression for two years then collapse of the dollar (and hence the world economy) down the road.

 

[russ_watters]

"Than", not "then". Changes the whole meaning...

But yeah, I agree. People don't take debt seriously until there are obvious consequences to the debt. We can either wait until we do a Greece or start sucking up an dealing with it while it is still a recoverable situation.

 

[SixNein]

I'm all for the fiscal cliff. Let people finally start to take the problem seriously. I'd rather have a bad recession/depression for two years then collapse of the dollar (and hence the world economy) down the road.

What is the point of worrying about debt if one is simply going to pull out a gun and shoot the economy anyway?

The liquidity trap is the most important problem we have in our economy right now. And the central bank cannot escape it on its own. If your worried about inflation on the dollar, the liquidity trap is the problem.

Federal Reserve Bank of Chicago President Charles Evans said further monetary stimulus is needed now to help the U.S. economy escape from a “liquidity trap.”

“There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape,” Evans said in prepared remarks for a speech today in Muncie, Indiana. “It is imperative to undertake action now.”

http://www.businessweek.com/news/2011-12-05/fed-s-evans-says-imperative-for-fomc-to-escape-liquidity-trap.html

What about fiscal policy? As Mike pointed out in his earlier paper, fiscal stimulus in a liquidity trap doesn’t require that you convince the market that you’re going to behave differently once the crisis is past. It doesn’t depend on expectations at all; the government just goes out and creates jobs. So it made a lot of sense to argue for stimulus as the main immediate response to the slump.

But isn’t fiscal stimulus also a hard sell politically? Yes, indeed – although the truth is that we did get some, and it probably had a major impact in softening the economic blow. And we would have had more if not for the scorched-earth opposition of Republicans, which is not a problem of economic analysis.

So what should well-meaning economists do now, with both fiscal and monetary policy falling short? The answer is, campaign on both fronts, trying to convince influential players both that austerity is wrong and that the Fed needs to start signaling its willingness to see more inflation before it raises rates.

http://krugman.blogs.nytimes.com/2012/09/01/monetary-versus-fiscal-policy-revisited/

 

[SixNein]

"Than", not "then". Changes the whole meaning...

But yeah, I agree. People don't take debt seriously until there are obvious consequences to the debt. We can either wait until we do a Greece or start sucking up an dealing with it while it is still a recoverable situation.

Do you think we should just ignore the liquidity trap then? I would also point out that Greece's problems are a bit different from Americas.

 

[mheslep]

Well, we could distribute the debt liability according to net wealth and income. The treasury could send out a statement with a list of options for a payment schedule - 1 yr, 2 yr, 5 yr, 10 yr, . . . .

Even that extreme measure will *not* stop the accumulation of more debt via entitlement spending. Why not address the problem directly?

 

[russ_watters]

What is the point of worrying about debt if one is simply going to pull out a gun and shoot the economy anyway?

I'd rather have temporary pain than permanent pain.

The liquidity trap is the most important problem we have in our economy right now. And the central bank cannot escape it on its own. If your worried about inflation on the dollar, the liquidity trap is the problem.

No, that doesn't have much of anything to do with the federal budget debt negotiations that I can see. Federal Reserve "stimulus" is not the same as federal government spending "stimulus".

Also, that article is a year old and the Fed has since done QE3.

I would also point out that Greece's problems are a bit different from Americas.

I would say that theirs are of the same nature, differing mostly in degree: Too much deficit spending on social programs, leading to too much debt.

 

[russ_watters]

Even that extreme measure will *not* stop the accumulation of more debt via entitlement spending. Why not address the problem directly?

Agreed. Slowing the accumulation (stopping it) is a much bigger issue - and a prerequisite, imo - than paying off what we have now.

 

[mheslep]

I'm all for the fiscal cliff. Let people finally start to take the problem seriously. I'd rather have a bad recession/depression for two years then collapse of the dollar (and hence the world economy) down the road.

"Than", not "then". Changes the whole meaning...

But yeah, I agree. People don't take debt seriously until there are obvious consequences to the debt. We can either wait until we do a Greece or start sucking up an dealing with it while it is still a recoverable situation.

Even going over the "fiscal cliff" will not make the deficit sustainable, as the cliff does nothing to reduce entitlement spending. The cliff does kick the can down the road, probably far enough to make it the next President's problem at the consequence of putting the economy in the tank for the next several years.

 

[mheslep]

http://news.yahoo.com/boehner-makes-fiscal-cliff-counter-offer-201946665--abc-news-politics.html

Only $2.2trillion over 10 years? ...

Yep, and which was immediately rejected by the White House.

White House spokesman Dan Pfeiffer criticized it for not meeting "the test of balance." Another Obama spokesman, Jay Carney, earlier said the president "will not sign a bill that extends those tax rates for the top 2%," as the GOP proposal would do.

Mentioning "balance" is risible, as the WH proposal is all increased taxes with net increased spending.

 

[russ_watters]

Even going over the "fiscal cliff" will not make the deficit sustainable, as the cliff does nothing to reduce entitlement spending. The cliff does kick the can down the road, probably far enough to make it the next President's problem at the consequence of putting the economy in the tank for the next several years.

Different "deficit". Yes, I'd like entitlement spending to be reigned-in, but the budget deficit is more immediate. Last I heard, Social Security will be unable to meet even the current pathetic promises by around 2037, but the federal budget won't make it to 2020 without reducing the deficit.

And even then, if SS and Medicare overrun, the government can simply change the rules and make them even worse deals than they are now. But that won't cause the economy to collapse. But if we keep running up debt and interest rates start to rise, our government will go bankrupt like Greece.

I've pretty much written those programs off. I'm trying to plan as if they completely cease to exist before I reach retirement age and I have to live off my own savings.

 

[Borg]

...I've pretty much written those programs off. I'm trying to plan as if they completely cease to exist before I reach retirement age and I have to live off my own savings.

Ditto on that. I've been telling my wife not to expect anything by the time that either of us retires. Sadly, those of us who are planning for this eventuality and saving will probably be hit by a means test - if the programs are still around. I say sadly not because I'm against doing my part but because it would be necessary because of the stupidity of the politicians.

 

[mheslep]

Different "deficit". Yes, I'd like entitlement spending to be reigned-in, but the budget deficit is more immediate.

Agreed. By sustainable, I mean that while tax increases and a couple hundred billion in cuts per the fiscal cliff will lower the deficit some immediately, the improvements will be eaten up again soon by federal healthcare and pension spending as it continues to explode.

Last I heard, Social Security will be unable to meet even the current pathetic promises by around 2037, but the federal budget won't make it to 2020 without reducing the deficit.

Those SS timelines a couple decades out are based on payment on loans from the SS trust fund to the rest of the government; in other words the repayment is the left hand of the government paying the right. Current SS income from outside the government does not pay for SS outlays *today*.

Social Security’s expenditures exceeded non-interest income in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period.

Which means that, like all federal spending, it is increasingly dependent on issuing debt to continue. If lenders decide to stop lending, then all SS is subject to failure, or payment in cheaper dollars, along w/ the rest of federal spending.

 

[russ_watters]

Those SS timelines a couple decades out are based on payment on loans from the SS trust fund to the rest of the government; in other words the repayment is the left hand of the government paying the right. Current SS income from outside the government does not pay for SS outlays *today*.

My reading of that is that SS outlays exceed the tax revenue. But that doesn't mean that SS is being funded from general tax revenue: it has its own trust fund, which is still growing:

According to the Social Security Trustees, who oversee the program and report on its financial condition, program costs are expected to exceed non-interest income from 2011 onward. However, due to interest (earned at a 4.4% rate in 2011) the program will run an overall surplus that adds to the fund through the end of 2021. Under current law, the securities in the fund represent a legal obligation the government must honor when program revenues are no longer sufficient to fully fund benefit payments. However, when the trust fund is used to cover program deficits in a given year, the Trust Fund balance is reduced. By 2033, the fund is expected to be exhausted.

http://en.wikipedia.org/wiki/Social_Security_Trust_Fund

The date was moved up to 2033, though...

And don't get me wrong. It needs to be fixed -- scrapped, even. The program has already failed at its primary purpose, which is providing retirement investment savings for workers. It no longer provides investment growth for most people. Since most of that is in increased taxes, not reduced benefits, basically it means it is reducing the standard of living of today's Americans to pay back the debts of of our grandparents, who paid in very little and took a lot.

 

[Astronuc]

From the Wikipedia article - "As of April 2012, the intragovernmental debt was $4.8 trillion of the $15.7 trillion national debt." So they've been financing government functions off funds allocated for future retirement security.

In theory, I have about $250K in my SS account (from my and corporate contributions). I'd like to transfer it to my kids, since I won't need it.

 

[russ_watters]

From the Wikipedia article - "As of April 2012, the intragovernmental debt was $4.8 trillion of the $15.7 trillion national debt." So they've been financing government functions off funds allocated for future retirement security.

Yes they've been raiding the SS trust fund to fund general government functions, not the other way around. At least it means we aren't paying 3rd parties (the Chinese?) interest on that splending, but we also aren't earning interest on it either.

Anyway, it means that fixing the normal debt will also help SS.

In theory, I have about $250K in my SS account (from my and corporate contributions). I'd like to transfer it to my kids, since I won't need it.

It would be nice if that were possible, but the program has been so mismanaged that it can't remain solvent without taking it from people who won't need it or have died young. Best bet? Take the money, invest it yourself and give it to them later.

 

[Alfi]

The more I read about this 'cliff' the more I like it.

These people that get paid a lot of money to do their jobs are being forced to do their jobs or actions will occur without them. At this point I think they should all be fired.
Simple case of failure to perform the job they were payed to do.

As Trump would say ... You're Fired.

 

[ImaLooser]

The more I read about this 'cliff' the more I like it.

These people that get paid a lot of money to do their jobs are being forced to do their jobs or actions will occur without them. At this point I think they should all be fired.
Simple case of failure to perform the job they were payed to do.

As Trump would say ... You're Fired.

The Rs seem to be stuck. They have been advocating cutting spending ever since they lost the power to direct increased spending to political allies. But they don't want to take the political hit of actually cutting spending. How can they wiggle out of it, since they control the House which controls spending? I dunno, but they sure will try. What they want to do is cut taxes for the rich and say that this will boost revenue so much that no spending cuts will be necessary. But Mr. Veto says no dice.

"Everybody tells me, they want to raise taxes and cut spending. But what they really mean is, they want to raise the other guy's taxes and cut the other guy's spending." -- President Bill Clinton.

 

[SixNein]

I'd rather have temporary pain than permanent pain. No, that doesn't have much of anything to do with the federal budget debt negotiations that I can see. Federal Reserve "stimulus" is not the same as federal government spending "stimulus".

Also, that article is a year old and the Fed has since done QE3.
I would say that theirs are of the same nature, differing mostly in degree: Too much deficit spending on social programs, leading to too much debt.

There is quite a few things to address here. First, I'm not sure if you are confusing a government budget with a household budget. In economics, they are very different animals, and one mustn't confuse the two.

Second, I think it's important that we categorize America's problems into three groups:
1. Short term problems.
2. Medium term problems.
3. Long term problems.

1. Short term problems:
We are not running at full employment, which means that our economy is running under capacity. Unemployment is high, and it will likely continue to be high through next year. In addition, our market is stuck in a liquidity trap. A liquidity trap means that the fed is unable to influence aggregate demand with monetary policy because interest is up against the zero constant. As such, the federal reserve cannot bring the economy back to full employment on its own; as a result, our economy is stuck in stagnation. And like Japan, it can last a pretty long time. This is why the central bank is important to discuss.

We are also still at risk of shocks to the market. Oil prices could increase causing input costs for firm to rise which results in slower economic growth and potentially more unemployment. In addition, weather events like Katrina could cause disruptions which causes input costs to rise.

We are also at risk from a EU collapse. While our exports losses to the EU would be a small hit, the financing the EU does in Latina America would be much larger and unpredictable hit to our exports.

China is pumping up a credit bubble of its own which could pop. Obviously, this would be bad for the American economy. And it may very well happen.

Perhaps the greatest short term risk is our political system. Politicians are creating enormous uncertainty in the market which could trigger a lack of confidence in America. For example, the "fiscal cliff" could better be defined as a "fiscal slope" to take some of the shock out of it in the market. The integration over the year of the fiscal cliff is what makes the policy a cliff. It cuts too much, too quickly, and too soon. But the greater threat is the expectations of the market created by the doomsday economic talk of our politicians which gets echoed over and over again in the media. As a result, they have created an unnecessary risk to the US economy. The expectations of the market could be very negative if we go over the cliff deadline since most are calculating that congress will avoid it, and they are frequently reminded of the impending disaster if it passes. But the actual truth is that congress has time even if the deadline is passed to prevent damage to the economy; however, the perceptions of the market is now a risk that could have been avoided.

The private debt collected during the bubble is likely a drag on the economy. People are paying off debts (if they are working) instead of buying things or investing in things. Obviously, this activity depresses aggregate demand.

2. Medium term problems.

The high debt accumulated as a result of the recession is a threat to the medium term economy. The threat is big because it can and will crowd out the market. In addition, government spending on necessary items may be neglected. The worse case scenario is a loss of confidence in the bond market which would cause yields to skyrocket.

The federal reserve runs a risk of loosing it's Independence. When and if the economy returns to full employment, the federal reserve may very well have a negative balance sheet due to its quantitative easing program. Even though the fed has a lot of tools at its disposal to effectively deal with the negative balance sheet (and it pays in its own currency), congress may use the negative balance sheet as an excuse to take away the fed's independence. (which would scare the living heck out of me).

3. Long term problems.
The largest long term problem is our growth rates on taxation and spending. Taxation seems to be in decay while spending seems to be growing rapidly. The government cannot tax like a small government but spend like a large government. To do so, the budget formula (taxes - outlays) will be negative and will contribute annually to our debt. Eventually, the markets will lose all faith in our debt. What nations are unable to pay won't be paid.

Our infrastructure is in really bad shape, and it will start dragging the economy down. As I said in another post, a nation cannot run a #1 economy on a third world infrastructure.

------------------------------------------------------------------------

So now I'm going to give a more detailed explanation of what congress needs to do but probably will not do.

First, Congress needs to announce that it is finally resolved to bring the economy back to full employment (read stimulus). It should announce it will do everything in its power to put American men and women back to work. This must be congresses first priority. As I said above, the fed is unable to act meaningfully to get us back to full employment on its own. Fiscal policy and not monetary policy is gong to be the main driver of where we go from here.

Second, congress needs to lay out reforms to various programs such that the growth rates are negative until they reach a sustainable point. In addition, taxation needs to be reformed such that taxes are positively growing until it reaches a sustainable point. These policies should come together to show that the American budget will eventually cross the equilibrium and reach a surplus. Spending cuts to programs with high growth rates are only temporary solutions. Congress needs to do reforms not cuts to solve the problem of high growth rates.

Third, Congress should make cuts where necessary. Foreign policy needs to be realigned such that it is economically sustainable in the long term. The military should be scaled back according to such policy. At this point and time, I think the military is quite overextended and our investments are probably not optimal.

Fourth, Congress needs to create various stress test and safety valves on policy effecting the economy. For example, spending cuts over a period of time should be interrupted if these stress test come back bad. These safety valves should help lift market expectations of the future. It will give them a clear message that congress is fully committed to ensuring it reaches full employment, and it is also going to be responsible about its debt.

In conclusion,

Congress has to deal with the immediate problems first. But it also needs to communicate clearly that it will be responsible in dealing with the medium and long term threats to the economy. Plans should be created with safety valves to give the market some insurance on its future expectations.

And I fully disagree with crossing the fiscal cliff or doing any kind of deep spending cuts right now. What are the benefits and risk of it? The benefit is a temporary relief of debt accumulation and the risk is economic suicide.

 

[ImaLooser]

The federal reserve runs a risk of loosing it's Independence.

One of us, one of us, gooble gabba one of us.

https://www.youtube.com/watch?v=bBXyB7niEc0

 

[Astronuc]

This is a start in the right direction - "NEW YORK (AP) -- Apple CEO Tim Cook says the company will move production of one of its existing lines of Mac computers from China to the United States next year."
http://news.yahoo.com/apple-produce-line-macs-us-133841213.html

 

[SixNein]

Here is a little discussion on the zero bound. While the author believes the Fed can get out of this a little easier than I do, we both agree that fiscal policy must be explored carefully.

The trouble is that deficit-reduction will not be a study of the economically ideal. It will be a study in political necessity. If the only way to protect the American economy against a massive dose of cuts is to make sure that what cuts do occur hit budget items with relatively high multipliers—and the government's notorious habit of squeezing "non-defence discretionary spending" until the pips squeak suggests this is a real possibility—then the resulting policy will be anything but tailored to minimise the damage to the American economy.

http://www.economist.com/blogs/freeexchange/2012/11/economy-and-election-0

 

[Astronuc]

Sen. Tom Coburn: I'm Willing to Accept Tax Increases

http://news.yahoo.com/sen-tom-coburn-im-willing-accept-tax-increases-163152570--abc-news-politics.html

And they still need to substantially cut expenditures.

 

[Locrian]

In theory, I have about $250K in my SS account (from my and corporate contributions). I'd like to transfer it to my kids, since I won't need it.

I think you're aware of this, but just in case someone else is not, there was never any attempt to create an "account" for you, and there has never been an attempt to fund social security. The trust fund is not an attempt to fund the program like a pension fund.

 

[Locrian]

Yes they've been raiding the SS trust fund to fund general government functions, not the other way around.

They have not been "raiding" the trust fund. That makes it sound like a decision was made to do something unusual. The trust fund has always been an accounting mechanism. It has never, at any time, been an attempt to set aside real assets to fund SS.

The excess of revenues over payments & administration has always* been put in non-marketable treasuries, which is just another way of saying that it was spent like any other taxes, but with a promise that future taxes would instead be transferred to SS recipients, if needed.

*well, since treasuries were issued. Prior to that it was really not different in a meaningful way.

 

[Astronuc]

I think you're aware of this, but just in case someone else is not, there was never any attempt to create an "account" for you, and there has never been an attempt to fund social security. The trust fund is not an attempt to fund the program like a pension fund.

I know I don't have an"account", although they apparently track (by SSN) what I've put in since my first job. I get an annual statement of accrual and what I would expect in a payment if I retire at 65, 66, 67, . . . .

I expect that by the time I reach 65, I will have put in about $350 K.

Meanwhile, http://www.wamc.org/post/can-fiscal-cliff-deal-be-both-and-out-reach-yes

 

[Locrian]

Different "deficit". Yes, I'd like entitlement spending to be reigned-in, but the budget deficit is more immediate.

Social Security is best thought of on the same budget, at least until the trust fund is depleted. Prior to that, if there is an excess of expenditures over income in SS then the trust fund will be reduced, which will result in money that could have been spent from the general fund instead being sent to SS recipients (or admin). (Or, alternatively, there will be additional debt created.)

Medicare Part A is similar to SS in financing, but note that Part B & D both pull money straight from the general fund, so they are not different budgets.

 

[Locrian]

I know I "account", although they apparently track (by SSN) what I've put in since my first job. I get an annual statement of accrual and what I would expect in a payment if I retire at 65, 66, 67, . . . .

I expect that by the time I reach 65, I will have put in about $350 K.

And it's just so wrong that they do that. It gives so many people the impression that SS is supposed to work like a pension fund.

But the last SSA trustees report I read calculated the closed block asset requirements at $20 trillion. Who in their right mind wants or trusts the government to manage $20T in (edit: financial) assets?

 

[aquitaine]

1. "Deserve" is a completely irrelevant question. There are lots and lots of things in life that are an utter crapshoot. Yeah, it sucks that he died from cancer. A close friend of mine died from a rare form of cancer when he was in 2nd grade and he had the best available care. Definitely unlucky. My sister got and beat breast cancer last year at the relatively young age of 37. Was she lucky or unlucky? Neither of them "deserved" to get cancer, but that's life.

Let's get our hyperboles in order here. I never said you claimed he deserved to get it, I said you said he deserved to die because he didn't have the means to get the care. :P I am glad your sister beat it though.

Sometimes (well -- ultimately, always) you die.

Speak for yourself, I plan to live forever.

2. It was you who used 100 years ago as a baseline, so please don't switch back and forth. Any treatment beyond the virtually nothing that existed back then is extra. Not getting to take advantage of all of the extras is not a negative, it is just a lack of a positve. And no, that's not the same thing.

Try it this way: I have $20. I give that $20 to the person standing next to you. Did you lose $20 or did you just gain nothing? Again, this mindset that people have that they are entitled to everything possible just because it exists is dangerous.

Regarding the car, you're missing the point of the analogy. Yes, you can live without a car, but that's not the point. The point is that if you have a car, spending more money can result in more safety. The same exists for planes, not to mention stairs. If two people are in an accident -- and yes, both could have possibly found an alternative to driving -- and the rich one has a modern car with a dozen airbags while the poor one is driving a beat-up 20 year old car without modern safety features, the rich one may live while the poor one dies. Does the poor guy deserve to die? No. Does that mean the rich guy should have bought him a better car? IMO, no. Both as a matter of morality and practicality.

Do I REALLY need to quote A Christmas Carol?

“If they would rather die, they had better do it, and decrease the surplus population.”

In any case I'm going to shock you: I'm not actually in favor of the current welfare system as it stands in its entirety. More on that later. But let's be honest with ourselves, that attitude is precisely the reason we ended up with Obamacare and Medicare instead of market oriented systems that could have actually resolved the underlying dysfunctions in our healthcare system while making sure that everyone can get healthcare. But by staking out an extreme socially darwinistic position you made it a choice between the unsustainable statist solutions...or nothing. Not everyone who doesn't think those without means should just die is a statist.

At the same time, you are trying to create a false dichotomy by saying "you can't live without it" with healthcare because implies that you can live with it. Sometimes you can and sometimes you can't -- both live with it and live without it.

You know what cured your sister of cancer? Healthcare. Don't tell me it isn't necessary to live and then tell me about how it saved her life. I'm glad it did, but you know what often happens with the uninsured? They use the hospital emergency rooms as their primary care practitioner, which is far more expensive and is done at taxpayers expense.

I don't know if you're purposely belittling the point by focusing just on cancer alone vs the downfall of Western civilization or if you just don't see it, but you are aware that we have a serious debt crisis, in part because of paying for things like cancer treatments (not to mention paying people to get rid of old cars...), right? You are posting in this thread, which is partly about that problem. The current economic downturn and related debt crisis, which is worse in Europe, exists largely because of overindulgence in entitlements. And you are aware that the problem is currently getting worse and not better, right? I'm not suggesting that we're going to collapse back to a hunter-gatherer society, but I think there is a significant non-zero risk of a long-term, significant decline in average standard of living. The healthcare cost problem is going to keep getting worse because the economic model we've chosen is flawed. Do you have a suggestion for how to fix it?

The spiral can't continue forever, of course. Either we'll fix it or it will fix itself:

1. It will fix itself by consuming (as mhselp said) a larger and larger fraction of our tax dollars until we simply can't afford to pay for more healthcare and as a result, drug compaines will stop doing research and healthcare quality will stop improving. Or:

2. (also as mhselp said) The reductions in other areas that have to be made to compensate for the "mandatory" spending on healthcare become too great to bear. You want free cancer treatment for everyone, regardless of the cost? Fine: then you can't have your roads maintained and you can't a have a police force and you can't have decent schools for your kids. Those things are not "entitlements". They aren't "mandatory spending". So they'll have to go. When our standard of living drops enough that we can't stand it anymore, we'll start to make the hard choices on "entitlements". Think that's far fetched? The consistently worst city in the US - Camden, NJ - slashed its police force by half in 2011, which significantly increased crime even more. Why would anyone do anything so idiotic? Police forces cost money and if you don't have it, you cut it. It is time we face-up to the economic and moral realities that healthcare is not a more important government function than such basics as police and that if the economy isn't doing well, everything has to take a hit.

Here's what I would do:

1.) Privatize Social Security - this is inevitable, better sooner than later.
2.) Institute vouchercare, on a sliding income scale the government will subsidize the premium and share that cost with the states, with regulatory reform to force insurance companies to accept people with pre-existing conditions as well as banning the practice of having doctors and hospitals in "networks". That way the insurance companies have to offer competitive plans to actually compete with each other. Since doctors and hospitals would no longer be in these protected "walled gardens" and would have to compete with each other in a real free market. That's what this should be about: providing consumers with a real choice. Since the onus is now on the individual to have insurance, via the individual mandate, employers would no longer be required to provide healthcare benefits to individuals, and the tax credit that subsidizes this practice would be ended.
3.) Replace the corporate and personal income tax with a VAT, there would be rebates for food and non-designer clothing. But ultimately this makes sure everyone pays their fair share, and a lot of deductibles will go away. People have to pay for these safety nets.
4.) I'd also cut the defense budget. There's no doubt more than a few "budget buster" projects like the F35 that can be safely cut. Also unneeded bases will be closed.
5.) End subsidies for farms and energy projects. The food stamp program is enough of a subsidy by inflating demand, although it is a necessity.

There's probably a couple of other things I would do but these are the big ones.

You cannot pay for things you don't have the money to pay for.

No arguments here. You're making assumptions about my position that aren't true. But let's stop pretending the statists are the only ones responsible for this mess. We went to 2 wars on a tax cut, that's almost the most fiscally irresponsible thing anyone could possibly do! No one does that, except the GOP of course. Back in the late 1990's when we had surpluses, instead of using it to pay down the debt, the GOP wanted more tax cuts. The GOP controlled congress from '94 to '06 and the white house from '00 to '08, and during all that time nothing was done to reform healthcare or medicare. I will give Bush at least some credit for his attempt to privatize social security, something that will be done sooner or later. I think the American Enterprise Institute has http://en.wikipedia.org/wiki/It's_Even_Worse_Than_It_Looks]summed[/PLAIN] up the current state of the GOP quite correctly:

.an insurgent outlier -- ideologically extreme; contemptuous of the inherited social and economic policy regime; scornful of compromise; unpersuaded by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition

And it's refusal to govern has let the country down. The only reason this issue has come up now is the president has a "D" next to his name instead of an "R".

So you tell me: would you trade a lower chance of dying of cancer for a lower chance of being murdered? That's the type of choice we're already making.

False dichotomy. The solution is radical reform of both the welfare and healthcare systems to make the former financially sustainable and the latter a real free market.