Monday, January 3, 2011

Thoughts on the national debt

News stories today are reporting that as of the end of December, the national debt has passed the $14 trillion mark. Technically that's not true, since $4.6 trillion of that amount is debt that the federal government owes to itself (e.g., money which Treasury has "borrowed" from social security), according to Treasury. Our debt to other parties currently totals $9.4 trillion, which works out to about 63% of GDP, and it has risen by more than $3 trillion since Q3/08.

I'm not trying to belittle the deterioration in our fiscal health, just trying to be more precise. Social security payments are not the same sort of obligations that are incurred when Treasury sells a bond. If Treasury were to default on its debt obligations, that would be very serious indeed, since Treasury debt is the bedrock of the world's financial system. But our national government can change the future payout of social security in ways that could drastically reduce the future unfunded obligation of that program (which, I reminded one of my nephews last night, is one of the worst scams ever perpetrated on today's young people—he would be far better off if he were allowed to direct his FICA contributions to a private investment/retirement account). Two very easy solutions that would make a world of difference: raising the retirement age, and adjusting future payments for the CPI instead of using the rise in incomes (which includes a real component in addition to inflation). If in addition to these changes we were to follow the example of Chile and allow people to opt out of social security voluntarily, in exchange for directing their own (mandatory) contributions to a private investment account, the social security problem might fade into relative obscurity before too long.

And since Medicare represents a huge potential unfunded liability, we could deal with the lion's share of that by simply changing the tax code to treat health insurance costs the same, whether one gets his insurance from an employer or pays for it out of his own pocket. Just let everyone deduct the cost of healthcare, or no one. That would soon result in a reversal in the decades-long march towards a system where today a third party pays for most people's healthcare costs. When someone else is paying the bill, you have very little incentive to shop around or otherwise cut costs, and competition among healthcare providers never gets much of a chance to make the healthcare market more efficient.

In any event, the chart at the top compares the burden of our national debt to the level of long-term bond yields. I've long been fascinated by this chart, since it shows what appears to be a very non-intuitive relationship: as the burden of our debt fell from WWII through 1980, interest rates rose; and as the burden of the debt rose from 1980 on, interest rates generally fell. The theory that government debt "crowds out" private debt by pushing interest rates higher just doesn't hold water according to this chart. The main determinant of interest rates, of course, is inflation, and there is no necessary connection between the amount of Treasury debt and the level of inflation. Unless, that is, the Federal Reserve decides to monetize the debt....  We may discover in coming years just how this works, now that the Fed has quasi-monetized almost 10% of our national debt. This will be the focus of intense interest over the next few years.

UPDATE: For more on federal deficits and how relatively easy it should be to balance the budget, see my posts here and here.


Benjamin Cole said...

I also watch the next few years with intense interest.

A Niagara of capital is out there to be utilized--could be yet the greatest epoch of all time.

I am thinking 13,000 on the Dow is do-able in 2011.

Federal debt--I doubt our political parties are up to fixing it. Look for slogging through.

brodero said...

"When someone else is paying the bill, you have very little incentive to shop around or otherwise cut costs, and competition among healthcare providers never gets much of a chance to make the healthcare market more efficient."

Is anybody ( politician wise)
willing to have a frank discussion with the public about this?? Sarah
Palin's condemnation of end of life
discussions is hurting this process
immensely....the final year of life
in medical costs is exorbitant....any politician who dodges this issue is either naive or patently fraudulent.

Charles said...

Would you starve your grandmother to make your mortgage payment on a house that is underwater? The legal status of the Social Security Trust Fund is irrelevant because Congress can change it overnight. For example, they can wave their hands and issue $4.6 T in "real" debt instruments to the trustees of the fund. There is no bankruptcy court to prevent present bondholders from getting stiffed. Something similar happened when GSE debt - which was explicitly not guaranteed by law - miraculously morphed into Treasury debt. The relevant question is the political status of the trust fund. And politically speaking, the trust fund is senior to any other debt obligation of the US government. Grandma will get her inflation-adjusted social security check as long as the trust fund exists.

Jean-Pierre Deslandes said...

It is not often that you see someone expose the true numbers of the US national debt. Congratulations for that. Of course the medias prefer the more impressive 14 trillions but the fact remains that US public finances are in better shape that most of Europe, Canada and of course Japan.

As for unfunded liabilities they exist also in those other countries except unlike in the US they are not accounted for in the public debt numbers. In Canada for example we have no idea how we will fund our costly (but already rationned and decaying) public health care system given the rapidly aging population...

Not to say that the US situation is great but it is in fact better than in the rest of the developped world. Even more so when you consider the more dynamic demographics and the larger unoccupied fiscal space.

In the last US budget debt service represented less than 5% of spending, this is not a lot, I remember days when the Canadian Federal gov. was spenfing close to 25% on debt service, yet Canada was able to reverse that situation. I believe that the cost of borrowing should remain relatively low for a while so the opportunity is there for the US to put its financial house in order without catastrophic measures.

Scott Grannis said...

Jean-Pierre: thanks for making that point. I too believe that putting our fiscal house in order is not impossible at all. In fact I am encouraged by the rise of the Tea Party and the results of the Nov. elections. The mood of Washington has changed and there is a real chance for fundamental change.

Buddy R Pacifico said...

A thought on Social Security: why not have a Soverign fund(s) similiar to Norway, Singapore, Kuwait, China etc.? I would not want this fund(s) borrowed against and would want multiple managers such as PIMCO, Russell and Morgan Stanley. It seems that this would be a quasi privatization.

Medicare is a whole different thing. There are many who game the system to get Medicare/caid benefits such as long term care. This is crazy and we can only demand and hope for leadership to confront this issue.

Benjamin Cole said...

Brodero raises a key point.
On health care, dare I say it, we need "death panels."
We need to cut costs by reducing health care to patients who are both terminally ill and aged. Some outfits do this already, such as Kaiser Permanent in CA.
I happen to be in an age bracket (mid-50s) where many friends have aged parents. It is remarkable how many say that their parents, or friend's parent, was "kept alive" for some period of time though no one really wished it to be so.

The hospital makes money billing per diem and per procedure.

A frank discussion about this topic seems above anybody in politics. The Tea Party, if anything, appears to be on the "wrong" side of this issue, with lots of heat about "death panels."

As for the Republican Party, I think they will use the health care issue to extract donations from the insurance industry, which actually likes the Obama plan, and then will leave Obamacare in place.

My take is that anyone should have got their living in before age 80. A few more bedridden weeks or months at age 86 is not something to look forward to.

As for me, if ever I become a drain on others, I want out.

brodero said...

"Holding spending constant, and assuming revenues grow at their current rate, the federal budget would be balanced in 5-6 years."

Didn't this kinda happen under
Clinton/Gingrich??? In other words economic
growth can to wonders....

Jeff said...

Grannis for President!

mmanagedaccounts said...

Life is not just about money. Benjamin may be content having someone appointed by the government deciding whether or not his wife lives, but I don't want anyone outside my family making that decision. Life or death is not an economic issue, it is a moral issue.

Paul said...

"A frank discussion about this topic seems above anybody in politics. The Tea Party, if anything, appears to be on the "wrong" side of this issue, with lots of heat about "death panels.

As for the Republican Party, I think they will use the health care issue..."

Blah, blah, blah. Obama and the Democrats create a health care monstrosity on top of our already unsustainable entitlements and, of course, Benji focuses like a laser on the Tea Party and GOP.

brodero said...

MManaged...I believe it is your choice as to whether you want a
relative to continue living but
shouldn't you also absorb the cost of that decision?? Or is society supposed to absorb the cost because
that is your belief??

Scott Grannis said...

I think that if you want to be in charge of your health care decisions you must also accept responsibility for the cost of your decisions.

vg said...

I wonder what affect people/businesses moving taxable events into 2010 to avoid higher (anticipated) rates in 2011+ had on tax receipts over the last 6 or so months? I.e., is this a short-term "bubble" in tax receipts; will it continue into the future?

Scott Grannis said...

Victor: that may well have been a factor, but now it is almost irrelevant: the economy is showing some real signs of life as we go into the new year, and equity markets are rising. Both should result in higher tax receipts this year.

Benjamin Cole said...


"Life is not just about money."

Of course. Although I got a bit of a chuckle about your sentiments following your screen name.

True, having loved ones near death is a trying experience.

Yet, do you want to hear this offer: "We can keep your grandmother alive for five to 60 days more, at a cost of $7,500 a day. Yes, or no?"

If you want an affordable plan, it will have to contain a clause that reads, "If doctors determine that a patient will not return to a normal life, they have the right to cease care and let God take over."

Or, we can go on spending double or triple the amount that socialist Europe does, and getting about the same results.

mmanagedaccounts said...

Scott and Brodero,
I agree that healthcare decisions ought to be left to the individuals involved, and that those individuals ought to bear the costs thereof, either by paying for them, or having an insurance policy that covers that cost.

What I do not agree with is that the government ought to make that life/death decision.

Benjamin, I do not think it should be up to the doctors to determine someone is not worth treating. Doctors should do everything within their power to preserve life, but if it is determined that someone is terminal that person or designated family member should have the right to suspend treatment. The government should not make that decision.

Who should pay for extending a life 30-90 days only? The person or persons making the decision.

I'm a day late in responding to other comments so I can only hope this post is read.

Many thanks to Scott for this site and to each of you for your thoughtful comments.

Benjamin Cole said...

Mmanagd accounts:
A tricky issue. I enjoyed your comments.