Wednesday, February 6, 2019

This is not going to get better!

Well, I'll be a poor, sad bastard!

The other day, Keith Hall, the Director of the Congressional Budget Office (CBO), dragged himself up to the US Senate for the usual sad recitation of simple financial facts that all the Senators, and the House members already know. Well, some of them anyway.

He had to sit in front of the U.S. Senate Budget Committee and talk about the CBO's recently released report on the Budget and Economic Outlook for 2019 to 2029.

The good news is that government revenue is increasing, likely hitting 16.5 percent of GDP this year, increasing to 17.4 percent in 2025, and 18.3 percent of GDP in 2029. Of course this is all built on economic models and we know how those go with assumptions of economic growth rates and so forth. For all the talk about econometric models the reality is that they're often little different to the spreadsheets ordinary people put together. So they'll contain smooth changes from month-to-month or quarter-to-quarter. But did anybody throw in even a bog-standard recession, something just on the order of the 1990-91 deal, with a couple of % GDP foregone?

The reason that's important is that the big factor for tax revenue is simply whether the economy is growing or not. Tax rates and tax types don't actually have much of an impact, as the last 80 years of IRS stats will show, with regard to the top marginal income tax rate, which is a good proxy for lower-band income tax rates.

Basically, US tax revenue fluctuates around 20%, no matter what you do with "taxing the rich". Same with Corporate Taxes:
What is a lot more predictable than revenue however, is government spending. It increases - relentlessly - and the only thing a recession in the model would do to such spending would be to increase it further and faster. That Keynesianism for you. According to the CBO, federal spending will increase from 20.8 percent of GDP this year to 23.0 percent in 2029, when revenue might be 18.3%. In other words, the already scary deficits are going to get scarier. We're not far away from having a $1 trillion deficit each year - in a good economy.

The main drivers are “the aging of the population and the rising cost of health care,” which are hammering the three big welfare programs, Social Security, Medicare (healthcare over 65) and Medicaid (healthcare for low income). These three are giant machines running on automatic. Congress has discretion - control - over a small, and shrinking amount of the Federal budget. And even that portion has a lot of elements that are basically out of their control and just increase. A couple of years ago I saw one calculation that the actual portion of the budget truly controlled with decisions, amounts to about 17% - and will shrink to 7% in the next decade.

Medicare/Medicaid are the monsters. They took a couple of years to crank up after being made law in 1965 so spending figures are from 1967 to 2018 and in nominal dollars:
Medicare collects premiums and other revenue, hence the net figure. Still, that's a growth rate for the two programs of 12% per year, for fifty one years. The US economy has never grown at that rate for even one year. There is no prospect of this changing so future payments are going to be difficult to meet. As explained by the Medicare Trustees

"The present value of a future stream of payments is the lump-sum amount that, if invested today, together with interest earnings would be just enough to meet each of the payments as it fell due. At the time of the last payment, the invested fund would be exactly zero." 

They calculate on a standard 75 year timeline and have that value at $33.5 trillion right now  - and there's no cookie jar to raid. Other scenarios (infinite horizon) are argued to be more realistic, but the low-ball figure is scary enough.
Social Security has another $20+ trillion of unfunded liabilities on the 75 year time frame, but that can probably be managed, because the government controls both the revenue and spending. The last changes were in the 1980's when President Reagan and Democrat House Speaker Tip O'Neill fought over, but ultimately agreed upon, myriad little changes to spending rates, adjustment rules, and the tax, to make it safe for another few decades. Such work will be required again soon, and should include the same gradual lift in eligibility age that other Western nations have implemented.

Medicaid's structure basically runs from year to year and the burden is shared with individual states, so unfunded liabilities are not its problem. But it too has to be paid for and while the Federal government has tried cutting rates paid for doctors and medical services, that's just resulted in Medicaid patients finding no doctor, clinic or hospital to serve them.

Medicare has no such outlet: benefits cannot be specifically cut or even much changed, and there is no rationing system as with New Zealand Health or the British NHS - one other thing that the "Medicare-For-All" crowd never talk about. If it did have rationing it would become like Medicaid, which nobody boasts about. But even if such could be implemented - and Obamacare did cut Medicare rates over time - the Medicare Trustees warn of the result:
"By 2040, simulations suggest that approximately half of hospitals, roughly two-thirds of skilled nursing facilities, and over 80 percent of home health agencies would have negative total facility margins, raising the possibility of access and quality-of-care issues for Medicare beneficiaries"  
Remember this roughly $50 trillion unfunded debt whenever anybody talks about the current Federal debt of $22 trillion. By the way, that infinite horizon analysis that's endorsed by a large number of economists (incuding Nobel prize winners) produces an unfunded debt figure of $210 trillion.

The final cherry on top is the fact that as the debt rises, and as interest rates slowly return to normal, they're going to drive up the federal government’s net interest costs, which this year sat at $364 billion. The Federal Reserve's long-term average is about 5%: that translates to $1.1 trillion per year in interest payments alone.

And this is just the Federal level. I've not even mentioned the similar debts and unfunded liabilities of pension funds and healthcare schemes in the states, many of which are in poor shape, and some - like California and Illinois - frightening.

So where does all this end? It would be nice if the work started now, but the number of politicians willing to even broach these subjects in D.C., can be counted on the fingers of one hand. The rest don't want to know and will continue to kick the can down the road. Admittedly the solution options are limited.

Forget just increasing taxes. The calculations already show that tax increases of 50%+ and spending cuts of 30%+ might produce enough money to plug the holes, but it's highly doubtful that US voters would accept such unprecedented taxation or cuts, let alone both in concert.

And this is without considering some of the new doozies being dreamed up by D.C. politicians: the Green New Deal, a trillion dollars of student debt wiped, and of course, Medicare For All (MFA).

MFA won't solve the problems unless it has rationing, and as the old British and NZ Labourites knew, that's tough to do unless the government also owns the hospitals - and that assumes Americans will accept healthcare rationing. Moreover, there are already two such government owned and funded programs: Veterans Health Administration and the Indian Health Service. They're both regarded as hideous disasters, so much so that laws have been changed to allow at least the VHA detainees to escape and spend their government funds on private providers. 

In any case, it seems unlikely that the US government would spend more trillions buying out private hospitals and clinics. Nationalisation could be done but what sort of crash that would induce in stocks and bonds does not bear thinking about, and it would likely be killed by the courts. Very fine prescriptive controls over the private sector would require a huge bureaucracy, and would be even less effective than they've been in other industries.

Given the Federal nature of the USA, one answer may be to have many answers, with each of the 50 states allowed to experiment with different approaches. Some efforts have already been made with block grants for smaller welfare and healthcare schemes, but D.C. likes power so it's questionable how far they'll let states go. And the current problems in these areas in some states mentioned above, are not encouraging.

My crystal ball view is that while these systems are not going to collapse, they will be circumscribed at some point. Current estimates are that people in the 2040's/50's will get Social Security benefits at less than 80% of today's pensioners. Medicare will certainly be below that. But that's still better than nothing. At some stage - probably sometime in the 30's/40's - Gen Z and whoever follows them will realise the Ponzi nature of these Pay-As-You-Go schemes and have the voting muscle to override the remaining Boomers. They'll ring-fence them for existing users and people about to retire, and force the development of private-public actuarial-based systems for both health and pensions.

This will all be very messy and clunky, but in a democracy there are no clean, one-shot solutions.

I see one of our commentators has managed to use his lobed fins...

... to struggle on to land bearing some arguments that are worth addressing because of their prominence in Leftist mythology.
The budget could easily be reined in by reinstating taxes on the wealthy..
The long-term graph in the original article gives the lie to that BS, and that also applies to the other “wealth” taxes that applied at the time, on estates and such like, that I see Bernie is talking about bring back. Dear god, the old crank hankers for 1950’s America worse than Pat Buchanan.
The US "Defence" budget could be slashed 80% and that would still leave more than enough money for defence.
The 2019 US Defence Budget is $716 billion, so 80% of that would be $573 billion. Yowza!!! That almost pays for last years Medicare. The problem of course is that annual growth rate of 12% over the last fifty years. Let’s be generous and imagine that we can cut it to just 6% from now on. At that rate Medicare/Medicaid would eat up that annual increase in about 6 1/2 years.

Oh - and a defense budget of $142 billion would amount to about 0.6% of 2019 GDP, New Zealand is at about 1.1%. Modern warfare has long since wiped out the idea of massive cutbacks at war’s end and massive buildups when the next one starts. The stuff has to be there, ready to go or you lose.

Even at 0.6% GDP the sheer size of the US economy does buy more capabilities than NZ of course - but it would basically mean cutting the US military to the point where it could not defend the place, or sea trade routes, or anything overseas that it depends upon. And if your answer to that is an almighty cheer I invite you to think about what China, Japan, Taiwan, Indonesia and others would do in terms of military buildup as most of the US Navy and Air Force mothballed itself: I sure as hell would not want to be in those areas to find out, and I doubt the USA would escape the consequences. Still - it would lead to massive increases in Australian defence spending and increased taxes for you, so Yay!.

Lastly, for all the endless Lefty yammering about US defence spending, the fact is that it has changed little since the early 1950's in constant dollars, and has had substantial cuts on four occasions.

It has also constantly reduced as a % of GDP (not to mention as a proportion of the Federal Budget).

None of those things are true of Social Security/Medicare/Medicaid.


David said...

Why this obsession with the US?

The budget could easily be reined in by reinstating taxes on the wealthy and giving up on invading other countries. The US "Defence" budget could be slashed 80% and that would still leave more than enough money for defence.

Anonymous said...

Riveting Tom, I hung on every word.

Lord Egbut Nobacon said...

I think I will wait for the movie to come out......

Adolf Fiinkensein said...

Thanks Tom. Excellent post. Now I understand the difference between Medicare and medicaid.

Adolf Fiinkensein said...


Why this obsession with the USA?

The Veteran said...

David ... because that's where his expertise is.

Why your obsession on taxing the 'rich' often defined as someone earning $1 more than you?

I see that in the US the top 50% of all taxpayers paid 97.2% of all individual income taxes while the bottom 50% paid the remaining 2.8%. Taking that a step further, the top 1% paid a greater share of all income tax (39%) while the figure for the bottom 90% combined was 29.4%.

Your slashing the defence budget by 80% has echos of the 'Ten Year Rule' plan first adopted by the British government in August 1919 which directly contributed to Hitler's aggressive policies. A real winner that one ... not.

Kimbo said...

Am I right in guessing that while the USA has the same foreseeable problem as developed nations like Europe, Canada, Japan, Australia and New Zealand - an aging population with proportionally fewer taxpayers to pay for social services - because the US has a more expensive health system they have a greater problem?

And as I understand it, the reason the US has a more expensive system is that it is private, with all of the benefits in new technologies that provides (and on which the rest of the world with their public systems rides their coat tails), and all of the extra investment/shareholder payment costs?

Tom Hunter said...

That's pretty much it. When LBJ got Medicare established he had to overcome the resistance of the American Medical Association, plus others, who were concerned that the system would stiff them on fees. So they charge Medicare as they would charge any insurance company. It's the worst possible combination: a government sugar daddy paying private sector people whatever they ask.

When Medicare was only a small % of total US healthcare spending, that was not an issue because the rest of the system kept a brake on costs. But with US healthcare spending now at 50:50 public:private (probably more like 50+: 50- now), it is an issue, and will be more so going forward. Still, clamping down in the multiple, classic ways of a government system is just not possible in the USA, barring revolutionary changes in attitudes towards rationing, private sector healthcare, private property and the wonders of bureaucracy.

Lord Egbut Nobacon said...

Veteran........your post merely reflects the growing divide in income and dissolution of the American middle class. The growing gap between the haves and the have nots will result in even more Trump like Presidents.

In the UK the top 1% pay 28% of the tax and so on downwards reflecting a more even wealth distribution.

You are also wrong on the UK defence budget prior to WW2 which did not feature in Hitlers plans or ambitions...

"Defence spending began to increase well before World War II. Starting at 2.9 percent of GDP in 1936 it reached 3.75 percent in 1938, and 9 percent in 1939. Appeasement or no, Britain started to rearm as the storm gathered. After the start of World War II, Britain mobilised all its national resources for the war, spending over 40 percent of GDP on defence for five years, peaking at 52 percent of GDP in 1945."

The Veteran said...

Egbut ... from 1919 to 1936 defence spending was subject to the Ten Year Rule ... look it up. Hitler saw the UK as a toothless tiger hence his decision to reoccupy the Rhineland on 7 March 1936 reinforced by the infamous Oxford Union debate of 9 February 1933 which saw the motion that 'This House will in no circumstances fight for King and Country' carried 275 votes to 153.

Your stats on increased defence spending from late 1936 on is irrelevant to my comment.

Lord Egbut Nobacon said...

The ten year rule is sometimes looked at in isolation. It assumed that the UK would not be involved in a major war for ten years. From 1919 to 1929 has no connection with the rise of Hitler. When the threat was realised defence spending went up in 1936.

The British army was not ill-equipped in 1939.It had more motor transport than the Germans who were still reliant on horses. They and the French had more tanks and more men than the Germans but they were still fighting the last war and forgot many of the lessons from 1918 about fire and movement, Air ground coordination and how national rivalries in high command destroy trust and effectiveness.

The ten year rule had no bearing on Hitlers thinking and the Oxford union debate even fact it is one of the great myths and placebo's of British propaganda on "why we were beaten"

David said...

Veteran can stretch an event so far it could circle the Earth twice before being challenged.

It must have come as quite a shock to Mr Hitler that the UK Government had removed itself from Westminster to Oxford. All that planning down the drain.

No doubt Mr Hitler was encouraged by √Čamon de Valera's government abolishing the loyalty oath to the UK crown, also in 1933, something neither of our nations are have been courageous enough to do, even though loyalties point more to Washington than Buck Palace.

Egbut, I understand both you and Veteran have been paid warriors. You seem to have moved on, but Veteran must view everything through the fog of war. He claims to be an historian, yet never seems capable of drawing the lines from one event to another, preferring to invent lines that didn't exist.

Adolf Fiinkensein said...

And David spends all his life drawing lines from one event to another in the vain hope he will overcome and rewrite history.

The Veteran said...

Egbut ... but from 1929 to 1936 it did. Certainly Hitler was emboldened by his belief the the British had lost the will to fight and the Oxford Union debate certainly contributed to that.

While you're right about the reliance the German Army had on horses any advantage the British Army had at the start of WW2 was negated by their totally outdated thinking evidenced by the effective sidelining of the likes of Boney Fuller and Liddel-Hart who were prepared to challenge military orthodoxy (L-H less so than Fuller).

A little bit of 'useless' history ... The last British mounted cavalry charge occurred on March 21, 1942 when a patrol of sowars of the Burma Frontier Force encountered Japanese infantry at Toungoo in central Burma. Led by Captain Arthur Sandeman of The Central India Horse (21st King George V's Own Horse), the BFF detachment charged and most were killed.