Tuesday, June 30, 2009

The coming fiscal train wreck


The Congressional Budget Office recently put together a document detailing the dreadful state of fiscal affairs. This chart shows the projections in their "Extended Baseline" scenario, which assumes that policies continue on their current course. It appears to me that they have borrowed a lot of the numbers for the next several years from Obama's budget; as such I figure that they are being overly optimistic about the decline in revenues as a share of GDP that starts next year, and they are also being overly optimistic about the surge in revenues next year. Therefore, the budget deficit is going to be far worse than the CBO's estimates, which are already absymally bad:

The current recession has little effect on long-term projections ... CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of these deficits, federal debt held by the public will soar from 41 percent of GDP at the ned of fiscal year 2008 to 60 percent at the end of fiscal year 2010.

If outlays grew as projected and revenues did not rise at a corresponding rate, annual deficits would climb and federal debt would grow significantly. Over time, the accumulation of debt would seriously harm the economy.

They go on to note that it is almost unimaginable to think that, in the absence of spending cuts, taxes could rise by enough to keep the deficit within reasonable ranges, since "tax rates would have to reach levels never seen ... (and) would slow the growth of the economy, making the spending burden harder to bear." As they further note, the most important factors driving the mega-expansion of federal spending in coming decades are Medicare, Medicaid, and Social Security.

Obviously these trends are unsustainable, so something will have to change. Roger Altman made the case for higher taxes in today's WSJ, and it's a safe bet that Obama realizes he is going to have to break his campaign pledge to not raise taxes on anyone making less than $250K a year. But taxes can't possibly close the gap we're looking at here. Something is going to have to be done to curtail the growth of federal entitlement programs.

And that's a very good reason why Obamacare is about the most irresponsible thing our "responsible" president could possibly come up with. It would only make a very bad situation impossible.

There is no shortage of alternatives, fortunately, but there is a shortage of political will. Here are some relatively simple solutions that could go a long way to avoiding the train wreck: 1) privatizing social security (allow people to opt out if they want), 2) raising the retirement age for social security benefits, 3) adjusting retirement benefits for inflation instead of the growth of real wages, 4) changing the tax code to eliminate the third party payer problem for healthcare, and 5) allowing insurance companies to sell healthcare policies across state lines.

The net effect of these measures would be to get government out of the business of providing retirement and healthcare benefits, thereby letting individuals and private markets find a more efficient and workable solution.

3 comments:

alstry said...

Scott,

Now we are on the same page. And it seems like Hoenig is catching on as well:

WASHINGTON (MarketWatch) -- Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, was critical of the government's "ad hoc" rescue efforts during the financial crisis, saying that the actions have institutionalized the concept of too-big-to fail in our economic system. Fed chief Ben Bernanke has argued that he, and others, acted like the emergency crew that saved a burning home before it destroys an entire neighborhood without asking whether the fire was started carelessly. In response, Hoenig asked "if the fire was started by a homeowner who ignored fire codes and smokes in bed, should the neighbors be required to rebuild the home at twice its original size at their expense?"

Paul said...

Not only is he going to raise our taxes, he's going to announce it by lecturing us about "fiscal responsibility" and such as if we were the ones who embarked on the ruinous, trillion dollar spending spree in order to reward his parasite constituents. He'll blame Bush too, of course.

W.E. Heasley, CLU, LUTCF said...

Barack Millhouse O'Caternomics will surely show up as Chapter 13 in future Economics Textbooks.