My take on the S&P downgrade of the U.S.: A) When was the last time a ratings agency showed some spine? Thatâs a good thing; B) We probably deserve to be downgraded given the combination of our debt, deficits, feeble economic recovery, and total sh*t show in Washington â but itâs absurd that Britain and France remain AAA Stable, while the U.S. is AA+ Negative; and C) Our debt problem is a lot more serious than most people understand, as this Business Week cover story highlights (full text at the end of this email):
There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadnât been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nationâs finances would be in fine condition today. And the only obstacle to getting there again, this narrative goes, is political dysfunction in Washington. If the Republicans and Democrats would just split their differences on spending and taxes and raise the debt ceiling, we could all get back to our real lives. Problem solved.
Except itâs not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nationâs financial condition. It includes only a small portion of the nationâs total liabilities. And itâs focused on the past. An honest assessment of the countryâs projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.
Thatâs why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But thatâs nothing compared with the real threats to the U.S.âs long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bushâs chief economic adviser, says: âThe word âunsustainableâ doesnât convey the problem enough, in my opinion.â
...........
Suppose that instead of paying Social Security payroll taxes, working people used that amount of money to buy bonds from the Social Security Administration, which they would redeem in their retirement years. In such an arrangement, the current and future cash flows would be identical, but because of a simple labeling change the reported debt held by the public would skyrocket. That example alone should generate a certain queasiness about the reliability of the numbers that are taken for granted by budget combatants on both sides of the aisle.
A more revealing calculation is the CBOâs measurement of whatâs called the fiscal gap. That figure is conceptually cleaner than the national debtâand consequently more alarming. Boston Universityâs Kotlikoff has extended the agencyâs analysis from 2085 out to the infinite horizon, which he says is the only method thatâs invulnerable to the frame-of-reference problem. Itâs an approach used by actuaries to make sure that a pension system doesnât contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gapâi.e., the net present value of all future expenses minus all future revenueâamounts to $211 trillion.
Yikes! Douglas J. Holtz-Eakin, a former director of the CBO from 2003 to 2005, says he doesnât favor the infinite-horizon calculation because the result you get depends too heavily on arbitrary assumptions, such as exactly when health-care cost growth slows. But directionally, he says, Kotlikoff is âexactly right.â
Iâm not worried about a U.S. default, however, as there are some fairly obvious fixes that greatly reduce the problem: means test Social Security and Medicare, raise or eliminate the cap on Soc Sec and Medicare taxes, gradually raise the eligibility age, put a hard cap on healthcare spending â and eliminate absurd tax loopholes like me paying a much lower tax rate than my secretary! It wonât be politically easy to do any of this â but we almost certainly will, as there is no other alternative. The question is, will we do it before we get into much worse trouble? I wish I were optimistic about thisâŚ
More from the article quoted here:
_http://www.businessweek.com/magazine/why-the-debt-crisis-is-even-worse-than-you-think-07272011_page_2.htmlAlso check out:
There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadnât been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nationâs finances would be in fine condition today. And the only obstacle to getting there again, this narrative goes, is political dysfunction in Washington. If the Republicans and Democrats would just split their differences on spending and taxes and raise the debt ceiling, we could all get back to our real lives. Problem solved.
Except itâs not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nationâs financial condition. It includes only a small portion of the nationâs total liabilities. And itâs focused on the past. An honest assessment of the countryâs projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.
Thatâs why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But thatâs nothing compared with the real threats to the U.S.âs long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bushâs chief economic adviser, says: âThe word âunsustainableâ doesnât convey the problem enough, in my opinion.â
...........
Suppose that instead of paying Social Security payroll taxes, working people used that amount of money to buy bonds from the Social Security Administration, which they would redeem in their retirement years. In such an arrangement, the current and future cash flows would be identical, but because of a simple labeling change the reported debt held by the public would skyrocket. That example alone should generate a certain queasiness about the reliability of the numbers that are taken for granted by budget combatants on both sides of the aisle.
A more revealing calculation is the CBOâs measurement of whatâs called the fiscal gap. That figure is conceptually cleaner than the national debtâand consequently more alarming. Boston Universityâs Kotlikoff has extended the agencyâs analysis from 2085 out to the infinite horizon, which he says is the only method thatâs invulnerable to the frame-of-reference problem. Itâs an approach used by actuaries to make sure that a pension system doesnât contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gapâi.e., the net present value of all future expenses minus all future revenueâamounts to $211 trillion.
Yikes! Douglas J. Holtz-Eakin, a former director of the CBO from 2003 to 2005, says he doesnât favor the infinite-horizon calculation because the result you get depends too heavily on arbitrary assumptions, such as exactly when health-care cost growth slows. But directionally, he says, Kotlikoff is âexactly right.â
Iâm not worried about a U.S. default, however, as there are some fairly obvious fixes that greatly reduce the problem: means test Social Security and Medicare, raise or eliminate the cap on Soc Sec and Medicare taxes, gradually raise the eligibility age, put a hard cap on healthcare spending â and eliminate absurd tax loopholes like me paying a much lower tax rate than my secretary! It wonât be politically easy to do any of this â but we almost certainly will, as there is no other alternative. The question is, will we do it before we get into much worse trouble? I wish I were optimistic about thisâŚ
More from the article quoted here:
_http://www.businessweek.com/magazine/why-the-debt-crisis-is-even-worse-than-you-think-07272011_page_2.htmlAlso check out:
