Debt and Deficits. Douglas J. Young Professor Emeritus Montana State University. January, 2011

Transcription

1 Debt and Deficits Douglas J. Young Professor Emeritus Montana State University January, 2011

2 Debt and Deficits 1. How Big is the Federal Government Debt? The Deficit? 2. How Much is Too Much? 3. The Long Term Outlook 4. What Can be Done

3 Definitions Deficit = Expenditure Revenue Usually, per year The Federal Government s deficit in 2010 was approximately $1.4 trillion. Debt = Accumulation of prior deficits less surpluses At a point in time, e.g. end of year The Federal Government s Debt on September 30, 2010 was $13.6 trillion.

4 10% Federal Deficits Percent of GDP 5% 0% % -10% -15% -20% -25% -30% -35% ERP 2010 and earlier, Tbl B-78

5 30% Federal Receipts and Outlays Receipts Outlays P e r c e n t o f G D P 25% 20% 15% 10% ERP,

6 The Debt How Big is It? Federal Government Debt = $13.6 Trillion, or $44,000 per person Non-Financial Corporate Business Debt = $13.6 Trillion Assets = $26.2 Trillion Household + Nonprofit Sector Debt = $13.9 Trillion Assets = $68.8 Trillion

7 Ownership of Federal Debt Billions of Dollars September 30, 2010 Total $13, % Agencies and Trusts $4,534 33% Federal Reserve $965 7% Domestic $3,887 29% Foreign $4,200 31% US Treasury

8 Federal Debt in the Long Run

9 Federal Government Debt Percent of GDP Taylor, Getting Back on Track, St. Louis Review, May-June, 2010

10 Percent of G D P 140% 120% 100% 80% 60% 40% 20% 0% ERP 2010 and earlier, Table B-78 Gross Federal Debt

11 Federal Debt 140% 120% P e r c e n t o f G D P 100% 80% 60% 40% 20% Gross Held by Public 0% ERP 2010 and earlier, Table B-78

12 How Much Debt is Too Much? When lenders worry that the country won t be willing and/or able to pay it back => Interest rates rise (dramatically) to compensate lenders for: Default Risk and/or Inflation Risk

13 When Lenders Lose Faith

14 Publicly Held Debt 140 Percent of GDP Greece Italy Belgium Portugal USA Spain Ireland Germany OECD

15 Would you loan Ireland money?

16

17 The Exchange Rate Effect If lenders distrust a country s debt Sell their bonds (as we have said) More generally, sell assets denominated in that currency in favor of others, because the whole economy is likely to be affected That is, sell that country s currency

18 Thailand: 1998

19 Malaysia: 1998

20 Korea: 1998

21 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Argentina: 2002 $US per Peso Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

22 The Effect on the Euro Not happening (much) in Europe, because Greece, Ireland, Spain, Portugal are a small part of the Euro Rescue package from European Central Bank Can sell Irish bonds and buy German bonds

23 Could a Run on the Dollar Occur? Yes, the US Dollar is the mostly widely held currency in the world But, China and other holders of US dollar-denominated assets would be harmed As the dollar fell If economic collapse ensued No evidence to suggest it (so far)

24 The US Dollar is Stable (so far)

25 As of January, 2011 The US Government Debt is NOT Too Much in the sense that it threatens the economic and financial system But Neither Debt nor Deficits, as Conventionally Measured, Include Promises Made to Future Generations

26

27 The Long Term Outlook National Commission on Fiscal Responsibility and Reform Not necessarily THE ANSWER Good discussion of the issues You decide what to do

28 Debt Scenarios

29 December Tax Deal

30 Flat Revenues; Growing Spending

31 What Can be Done? Cut Spending (from what it would otherwise be) Health Care Social Security Other (Discretionary) Spending Raise Revenues Tax Reform

32 Deficits with and without Reform

33

34

35 What the Commission recommends Do not implement the 23% cut in physician payments in current law But Freeze physician payments from 2012 to 2020 Direct the CMS to develop an improved physician payment formula that encourages care coordination and pays based on quality not quantity

36 Recommendations - 2 Reduce Fraud Malpractice (Legal) Reform Require minimum deductibles and cost-sharing in Medicare supplements 3.6 Establish a long-term global budget for total health care spending and limit the growth to GDP + 1%

37 Social Security

38 Social Security Make the benefit formula more progressive, ie reduce benefits for high-earners and increase them for the lowest earners, those older than 85, and long-term disability recipients

39 Social Security - 2 Gradually increase early and full retirement ages by 2 years based on increases in life expectancy Hardship exemption at age 62 Increase taxable earnings to cover 90% (versus 86% today) Use the chained CPI for inflation Cover all new S&L workers

40 Discretionary Spending Includes defense, education, courts, unemployment, agriculture, spending on Congress and the Executive Branch, etc. Does not include formula programs like health spending, social security or legal obligations like interest

41 Discretionary Spending - 2 Enact tough spending caps with real teeth to bind Congress Make significant cuts in both security and non-security spending Cut agriculture spending Reform civil service and military retirement Pay freeze (including Congress!)

42 Tax Reform (Doug s translation in italics) Lower tax rates and broaden base (Eliminate or limit deductions) Reduce the deficit (Raise taxes) Increase progressivity (Raise taxes on the rich) Make America the best place to start a business and create jobs (Cut the corporate tax rate)

43 Individual Income Tax - 1 Reduce the top personal rate from 35% to 23-29% Increase taxes $80 billion in 2015 and $180 billion in 2020 Repeal the AMT and phase out of deductions and exemptions

44 Individual Income Tax - 2 Tax capital gains & dividends as ordinary income Eliminate itemized deductions (!) 12% tax credit for mortgage interest on principal residence (capped) 12% tax credit on charitable donations > 2% of AGI

45 Individual Income Tax - 3 Cap exclusion of employer-provided health insurance Tax interest on new S&L bonds Cap exclusion for contributions to retirement accounts at $20,000 or 20% of income Eliminate 150 other tax expenditures

46

47 Corporate Tax Lower top rate from 35% to 23-29% Eliminate subsidies for particular businesses (Drilling expenses. Ethanol? Green energy?) Change taxation of foreign source income

48 Summary The US government debt is not now at dangerous levels However, a continuation of current policies for 25 years would be problematic at best The Deficit Commission laid out a (mostly) coherent solution Does the political will exist?

49 Questions? This presentation is available at: Click on Papers Then Debt and Deficits Under Other