DawgTalkers.net Forums DawgTalk Everything Else... The National Debt

Here's a nice article from the WSJ that's a good primer on the situation we're in regarding our country's debt. I'll save my commentary on one point for a future post.

The Magnitude of the Mess We're In

The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.

By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor

Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don't want, but need, to hear.

Where are we now?

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.

The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.

The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.

Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens' and institutions' purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.

The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.

The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?

The Fed's policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.

The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed's Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury's traditional debt management.

This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.

The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.

Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.

This is all bad enough, but where we are headed is even worse.

President Obama's budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.

Under the president's budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans' health and the National Institutes of Health combined.

Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.

What does this spending and debt mean in the long run if it is not controlled? One result will be ever-higher income and payroll taxes on all taxpayers that will reach over 80% at the top and 70% for many middle-income working couples.

Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.

The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why an independent agency of government should have this power.

When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy. Are you surprised that so much cash is waiting on the sidelines?

What's at stake?

We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar's role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.

Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation's greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt "foreign and domestic, was the price of liberty."

History has reconfirmed Hamilton's wisdom. As historian John Steele Gordon has written, our nation's ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.

The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.

The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.

The authors are senior fellows at Stanford University's Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.

A version of this article appeared September 17, 2012, on page A19 in the U.S. edition of The Wall Street Journal, with the headline: The Magnitude of the Mess We're In.

Dont worry, the next generation can pay it off...

Being in my mid-20's, this is what upsets me about politics today: everyone I talk to says we need to cut federal spending. It's out of control. But what happens when a politician wants to cut spending?

"He wants to cut funding for women's health services! He must hate women!"

"Cutting federal employee's benefits!? He must hate them!"

"Why is he cutting Medicare funding?! Old people need that!"

"We can't cut military funding. We need to protect the troops and keep America safe!" (We need to give our troops as much protection as they need for protection, but we don't need to flex our military-might all over the world)

No one wants to sacrifice anything. Their solution is just to tax the rich. And if a politician does promise to cut spending they get chastised for it. If we're going to get out of this hole, everyone needs to pay their share. Maybe the rich could pay slightly more, but we also need cut federal spending for programs that primarily benefit the middle and lower class. What a novel idea!

Everyone just wants what's best for them. You know why Social Security was so popular when it was created? Because it's basically a Ponzi scheme, and the people that started it made out like bandits. My generation is probably never going to get one cent of SS, and if things keep going like they are, the government will probably start trying to get their fingers on my 401k soon too.

The same thing is going on with federal spending right now. It's all a Ponzi scheme. We keep spending and spending, piling up more and more debt, and everyone is just hoping that they aren't here when the bubble bursts.

I really think it's funny when I hear Liberals say "We need to protect the environment so it's here for our kids," but have no problems running up the national debt. What do you really think is a bigger threat to our kids and more likely to happen? Global warming or economic collapse.

I dislike Romney and don't think he'll change this too much (but I kinda like Ryan), but I have absolutely no faith in Obama to reverse federal spending. Just give me one candidate that promises to balance the budget and will actually follow through with it. Please!

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No one wants to sacrifice anything

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So, we start by taking a little bit from everything!

10% reduction in *EVERYTHING* across the board.

I'd be all for that. But somehow that doesn't make any sense to anyone in the government.

The funny (not funny) thing is that even that wouldn't do it. We're currently spending more than a trillion a year more than we're taking in and have for every year of this presidency.

What needs to happen is a balanced budget amendment to the Constitution.

Have the politicians battle it out for how those dollars are spent but you cannot add to the debt.

That would at least stop the madness. Then we'd have to work on paying down the 16 trillion over the course of 40 or 50 years.

Honestly the only way to stop this is a constitutional amendment.

If I were a betting man I'd bet that a plurality of the american public would support such an amendment. And 0.00% of politicians would.

By the way....

One of my biggest pet peeves....

Why is military spending off the table when it comes to the Republican Party? It's maddening.

Right size the military. It's obviously too big for the times. We're not getting into a land war in the next 30 years at a minimum. We have gigantic air superiority advantage and I support maintaining that. But why do we have so many armed personnel again???

Like I said it's maddening.

I dislike this whole debt thing..

Something has to give,,, As best as I can figure

The Bush tax cuts are about 300 billion of the 1.3 trillion deficit.
Defense spending has gone up about 400 billion dollars
That prescription drug plan is about another 400 billion and the government pays full price for the perscriptions
Add on top of it the higher amount of federal support as a result of the economy through unemployment benefits, Medicaid and voilla..

Something has to give, in a big way...and as long as Grover Norquist holds the republican party to his bs pledge, we will go nowhere.

And Romney wants to keep the Bush tax cuts and drop the tax rates another 20 percent.... and balance the budget.... sure....

The math is Washington is just terrible.

I am looking forward to sequestration.

I have to laugh at someone from the Hoover institute even talking about the solutions to this mess.

And the proposed solutions are without merit.

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even though we spend more money than the next 7 largest countries combined

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It's more than that. The US defense budget nearly matches the rest of the world's COMBINED defense budget.

I see no problem with cutting defense spending as much as we realistically can. I don't want to see hundreds of billions of dollars spent on ineffective weapons systems, or systems that are outdated by the time they hit the field, but were carried on because they were in an influential district. I would rather pay soldiers and other members of the military more while cutting out the military pork.

I am rather PO'd at Romney for one statement he recently made. He said something about not completely doing away with Obamacare, but keeping some of the good things are replacing the rest. As much as I hate to admit the he was right about this particular issue, PDR did hit this one on the head. This law needs to be repealed and then they can put together a more reasoned and reasonable alternative if they can ..... but repeal has to be the first step. Romney seems less likely to do this at this point.

I am rapidly giving up hope for this country. We will be broke in no time flat .... and we have already passed the point where we couldn't pay off the national debt if we used every penny that every person, company, and corporation in the entire country makes in an entire year. In the next 4 years, we may hit $20-25 trillion in national debt at the rate we're going. We're in deep trouble, and I am reaching the point where I see no way out.

Oh well, at least I don't have kids to leave this mess to.

I wonder at what point people that work 2 or 3 jobs are going to start questioning these people on Food Stamps and WIC that come in the grocery store wearing pajamas and sweats and driving off with nicer cars than they have.

At some point.. people are going to wonder why they work to pay taxes

Well.what is your generation demanding of those you support? The National Debt has gone from $10.9 trillion to over $16 trillion in the past 3.5 years.How will your generation, who are a powerful voting block, demand this kind of change, and what will you do when a President doesn't keep his word?

I could ask this of all generations and groups as well.

Not even getting into the politics of it ..... the flooding of the market with phony dollars devalues the net worth of everyone. Savings are almost worthless, and interest rates currently being paid don't even begin to keep up with inflation. Add in declining home values, and it's really hit the middle class hard. Someone who has tried to do things the right way, saving money for emergencies and such, is really being punished.

j/c

Here are my thoughts on this whole mess...

National Debt broken down by President, House, and Senate

Look at who controlled the house and senate. As you can see, pretty much everytime there was a major upward spike in the GDP, you will find a blue house and senate. Pretty much everytime there was a red house and senate, the GDP dropped. Give me a red house and senate, you can have your blue president.

And with many things that go stale, it will take time for the old to die off and the new to fill the cvacancy before we see any real change.

If I added that up right it's roughly 681.3 Billion.

I agree with almost everything you said.

Tax reform to a consumption tax would be great. Never going to happen, but I've been an advocate for Fair Tax for years.

jc

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U.S. Representative John Hostettler (R-IN)
"the Internal Revenue Code and regulations add up to one million words and is nearly seven times the length of the Bible"


U.S. Representative Rob Portman (R-OH)
"The income tax code and its associated regulations contain almost 5.6 million words -- seven times as many words as the Bible. Taxpayers now spend about 5.4 billion hours a year trying to comply with 2,500 pages of tax laws...."


U.S. Representative J.C. Watts, Jr. (R-OK)
"The heart of IRS abuse lies in the existing tax code. Most of the folks who work for the IRS are good people just trying to do their job, but they are caught in a bad, overextended tax system. At 3,458 pages, twice the length of the Bible, it's impossible for the average taxpayer to know, understand, and accurately apply its provisions. The length is twice that of the Bible! Even tax experts cannot do so reliably."


U.S. Representative Spencer Bachus (R-AL)
"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."


U.S. Representative Bill Archer (R-TX)
"The Internal Revenue Code and regulations now come in at one million words and 9000 pages."


U.S. Representative Jo Ann Emerson (R-MO)
"The Bible, the guide of our lives, is 1,291 pages and contains 774,746 words. But the Tax Code and its regulations which are referred to by some as, 'a person's worst nightmare come true' is 9,471 pages and over 7 million words."


U.S. Representative Vito Fossella (R-NY)
"the tax code runs 17,000 pages and contains a mind-boggling 5.5 million words. By way of comparison, War and Peace is only 1,444 pages and the Bible checks in at 1,291 pages."


U.S. Representative Jim DeMint (R-SC)
"The federal tax code with its 44,000 pages, 5.5 million words, and 721 different forms is a patchwork maze of complexity and a testament to confusion over common sense."


U.S. Representative Walter Jones (R-NC)
"The IRS tax code is 44,000 pages and growing"


U.S. Representative Bobby Jindal (R-LA)
"The current tax code is almost 60,000 pages, longer than the Bible"


U.S. Representative Dave Hobson (R-OH)
"the current tax code, which at 1.3 million pages is twice the length of Tolstoy's War and Peace"


U.S. Representative Nick Smith (R-MI)
"the federal tax code has about four times as many words as the bible. Accompanying the law are a staggering two-and-a-half million pages of regulations"


...and President George W. Bush (courtesy of Professor Paul Caron of the TaxProf Blog)
U.S. Representative John Hostettler (R-IN) "The tax code is a complicated mess. You realize, it's a million pages long."





So, depending on whom you ask, our elected representatives are of the opinion that this particular section of the United States Code is somewhere between 2,500 and 2,500,000 pages long.

But one thing they do know for sure, at least if they're members of the Republican Party, is that the US tax code is longer than the Bible. Personally, I think the only way we're ever going to see that reversed is if Congress decides to enact its own official version of the Bible. If that happens, all bets are off.



By the way, if you go to the US Government Printing Office ( www.gpo.gov ), you can order a complete set of Title 26 of the US Code of Federal Regulations (that's the part written by the IRS), all twenty volumes of it, at the bargain price of $974, shipping included.


According to the US Government Printing Office, it's 13,458 pages in total. The full text of Title 26 of the United States Code (the part written by Congress--available for an additional $179) is a mere 3,387 printed pages, bringing the adjusted gross page count to 16,845.

The number of words has been left as an exercise for the student.

LINK

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However it is that taxes are to be paid...people will cheat the system and the IRS will still be necessary to ensure that people are following the rules.

Just because the tax is on something different than income, does not guarantee that everyone will collect/charge the tax or report the sale or remit the dollars to the fed.

Withholding taxes from someone's paycheck is something that the payee will pay attention to...yet some employers don't remit those taxes either and have to be chased down by the IRS. That same issue will occur (taxes not being remitted) yet with no one paying attention (as one would with withholdings).

"under the table" earnings will be offset by "under the table purchases"

Not to mention...the first thing to go in effect will be exceptions and exemptions to make it "fair"...putting us right back to where we are today.

We have a spending problem...let's fix that TODAY...then ramp up tax rates if deemed/proved necessary...the changes do not have to be one-sided nor parallel in implementation.

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However it is that taxes are to be paid...people will cheat the system and the IRS will still be necessary to ensure that people are following the rules.

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Absolutly true. We'll never be able to completely do away with the IRS, but it can and should be about 20% of it's current size.,

And here's why..

The retailer that sells you something is now the tax collector. We will need someone that can make sure they are 1. charging tax and 2. paying it to the correct entity and paying the correct amount.

Not just retailers, but anyone that sells anything to anyone. for instance, you own a company that makes widgets. You make those widgets out of steel. So, the steel company that sells you the steel must collect sales/consumption tax and then pass it on to the proper entity. We'll need IRS agents to watch over that as well.

What we don't need is a duplication of efforts.

Currently, Just looking at Ohio, we have several agencies doing those jobs. IRS, State of Ohio Income Tax Department and the Sales Tax Department, City or County tax agencies, like for instance up here, we have RITA (regional income Tax Authority)

All of those become redundant.


So we set up one agency that does all for all federal, state and county and city entities.

You want smaller government, you want a fair tax system, there you go

Combine that with cuts in other areas.... I bet we are back on track within 5 years.. At the current rate under the current system, we'll never get back on track.

Oh,, Exceptions,., Food maybe, clothing maybe. Medical treatments maybe, Prescription drugs maybe.,

Beyond that,, everything else is on the table to be taxed...

Now also keep in mind, I'm no expert.. not even close, so there are probably a million considerations I've not given a thought too..

But in general, the spirit of the plan is everyone carries the weight and burden in a fairer fashion.

The rich will pay more taxes,, but not because they make more money, but because they spend more money... the more they control their spending, the less they pay. Same for middle class folks.

The other hitch I see in this is, how much will this tax need to be? How high of a percentage will it take to replace our current revenue stream.

Taking into consideration of course that there will be more people paying in than before and smaller government etc.

I have no idea how to calculate what it would take, but a rough guess tells me that 15% National Consumption tax might be high enough but then you have to add in state and local to both replace the income tax and the current sales tax so that might be nother 12 to 15% or even more. Could end up being as much as 35% total.

But it's not of what you make, it's of what you spend.. which if it works right, is a smaller number than what you make.

There are holes, but it's something to consider

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for instance, you own a company that makes widgets. You make those widgets out of steel.

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Widgets are little links on the screen of a cell phone or a tablet.. why on earth would you make them out of steel?

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So, the steel company that sells you the steel must collect sales/consumption tax and then pass it on to the proper entity. We'll need IRS agents to watch over that as well.

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As I understand it only the end user is taxed.. so if I buy steel to make widgets, then I don't pay tax on the steel, the person who buys the widgets pays the tax. It would require some agents of the IRS to make sure it is being properly tracked though because while it is simpler than what we have, it would have its nuances.