Deficit Day to Bankruptcy Day - PDF Free Download

Deficit Day to Bankruptcy Day April 2014 copies of this presentation can be found at

Jan 1 Dec 31 Deficit Day!

How much government spending do people fund with their tax dollars? Top 1% 56 days 2% to 5% 44 days 5% to 10% 31 days 10% to 20% 41 days 20% to 40% 47 days 40% to 60% 24 days 60% to 80% 10 days 80% to 100% 18 hours 2012 Children 112 days Deficit Day 2012

How Much Does the Government Owe?

How much money does the government owe? Borrowed from Social Security Borrowed from people and foreign governments Total debt $5 trillion $12 trillion $17 trillion

How much is $17 trillion?

Promised future retirement and medical benefits Social Security and Medicare Trust Funds minus Anticipated future Social Security and Medicare Taxes Unfunded Obligations minus equals

How much money does the government owe? Borrowed from Social Security Borrowed from people and foreign governments Total debt Unfunded obligations Debt plus unfunded obligations $5 trillion $12 trillion $17 trillion $80 trillion $97 trillion

How much would $97 trillion buy?

A government is bankrupt when it can no longer service its debt. Interest on the debt equals tax revenues.

At current interest rates: 2.6% x $97 trillion = $2.5 trillion 2013 Federal revenue = $2.8 trillion Translation: Counting unfunded obligations, the federal government is bankrupt right now.

Dangers of so much debt Too easy for politicians to make much ado about nothing. $300 million cut in Community Development Block Grants. $300 million = 45 minutes.

Dangers of so much debt Too easy for politicians to make much ado about nothing. Pressure on Federal Reserve to keep interest rates low. +1% =

Dangers of so much debt Too easy for politicians to make much ado about nothing. Pressure on Federal Reserve to keep interest rates low. Quickly approaching a point of no return.

Federal Debt Outstanding as Fraction of GDP Federal Receipts Debt per GDP useful for comparing debt across countries not useful for measuring ability to service the debt Source: Office of Management and Budget, White House

Federal Debt Outstanding as Fraction of Federal Receipts (excludes the $80 trillion unfunded obligations) Equivalent to a household with $50,000 income being $325,000 in debt. Source: Office of Management and Budget, White House

What s the source of the problem?

Perhaps the debt problem is really a revenue problem.?? Revenue Spending Revenue Spending? Revenue Spending? Deficit Deficit Deficit Deficit Revenue Spending Debt

1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Billions $3,000 Federal revenue has risen 6.9% per year (on average). $2,500 $2,000 $1,500 $1,000 $500 $0 Federal Revenue Data Source: US Department of the Treasury

Not fair. Prices have been rising over time.

1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Billions $3,000 $2,500 Federal revenue has risen 3.3% faster then inflation per year (on average). $2,000 $1,500 $1,000 $500 $0 Federal Revenue Federal Revenue (adjusted for inflation) Data Source: US Department of the Treasury

Not fair. The population has been growing over time.

1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Billions $3,000 $2,500 Federal revenue per person has risen 2.2% faster then inflation per year (on average). $10,000 $9,000 $8,000 $2,000 $1,500 $2,070 per person (2010$) $7,000 $6,000 $5,000 $1,000 $500 $7,000 per person (2010$) $4,000 $3,000 $2,000 $1,000 $0 $0 Federal Revenue Federal Revenue (adjusted for inflation) Federal Revenue (adjusted for inflation, per capita) Data Source: US Department of the Treasury

Tax revenue may be rising, but it isn t rising fast enough. To reduce the deficit, we need to raise tax rates!

Tax Revenue per Capita (2010$) One Year Later $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Top Marginal Income Tax Rate (1954 to 2009) Data Source: Tax Policy Center (Urban Institute and Brookings Institute), National Bureau of Economic Research, Bureau of Economic Analysis

Tax Revenue per Capita (2010$) One Year Later $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Top Capital Gains Tax Rate (1954 to 2009) Data Source: Tax Policy Center (Urban Institute and Brookings Institute), National Bureau of Economic Research, Bureau of Economic Analysis

Tax Revenue per Capita (2010$) One Year Later $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Effective Corporate Profits Tax Rate (1959 to 2005) Data Source: Tax Policy Center (Urban Institute and Brookings Institute), National Bureau of Economic Research, Bureau of Economic Analysis

Tax Revenue per Capita (2010$) One Year Later $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Social Security plus Medicare Tax Rates (1954 to 2009) Data Source: Tax Policy Center (Urban Institute and Brookings Institute), National Bureau of Economic Research, Bureau of Economic Analysis

Enough of this nonsense! The problem is that the rich aren t paying their fair share

What s fair?

Distribution of Federal Taxes (all taxes combined) Income Category Income Before Taxes & Transfers (per household) Federal Taxes (per household) Average Tax Rate (ignore transfers) Bottom Quintile $15,000 $200 1% Second Quintile $28,700 $2,900 7% Middle Quintile $48,900 $7,200 11% Fourth Quintile $79,900 $14,100 15% 81% to 90% $120,700 $24,700 19% 91% to 95% $164,800 $37,000 21% 96% to 99% $262,200 $65,600 24% Top 1% $1,209,200 $353,000 29% Data Source: Congressional Budget Office A person in the top 1% earns 25 times what a person in the middle quintile earns, but pays 50 times the taxes.

Transfers: Negative taxes Net taxes paid = taxes paid transfers received $700 $1,000 $300

Distribution of Federal Taxes (all taxes combined) Income Category Income Before Taxes & Transfers (per household) Federal Taxes less Transfers (per household) Average Tax Rate (with transfers) Bottom Quintile $15,000 -$8,300-55% Second Quintile $28,700 -$11,800-41% Middle Quintile $48,900 -$8,200-17% Fourth Quintile $79,900 $200 0% 81% to 90% $120,700 $13,600 11% 91% to 95% $164,800 $26,000 16% 96% to 99% $262,200 $56,000 21% Top 1% $1,209,200 $342,500 28% Data Source: Congressional Budget Office

Whom Do You Want to Tax? Income Category Minimum Income Average Tax Rate Income After Taxes & Federal Taxes (ignore transfers) Transfers (per household) Federal Tax Revenue Bottom Quintile $0 1.3% $200 $23,300 $4,540,000,000 Second Quintile $20,000 10.1% $2,900 $40,500 $68,440,000,000 Middle Quintile $40,000 14.7% $7,200 $57,100 $170,640,000,000 Fourth Quintile $65,000 17.6% $14,100 $79,700 $328,530,000,000 81% to 90% $100,000 20.5% $24,700 $107,100 $291,460,000,000 91% to 95% $140,000 22.5% $37,000 $138,800 $218,300,000,000 96% to 99% $200,000 25.0% $65,600 $206,200 $314,880,000,000 Top 1% $340,000 29.2% $353,000 $866,700 $388,300,000,000 New Income Tax Revenue $1,785,090,000,000 New Deficit $1,400,000,000,000 Data Source: Congressional Budget Office

The larger economic problem involves the not yet rich.

Perhaps the debt problem is really a spending problem.? Revenue Spending Revenue Spending Revenue Deficit Deficit Deficit Deficit?? Spending Revenue Spending? Debt

1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Annual Cost per Person $12,000 $10,000 The average price level has risen 700% since 1954. $8,000 $6,000 $4,000 $2,000 $0 Average Price Level Data Source: Bureau of Labor Statistics, Bureau of Economic Analysis

1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Annual Cost per Person $12,000 $10,000 $8,000 The average price level has risen 700% since 1954. The per-person cost of the Federal government has risen 3,000% since 1954. $6,000 $4,000 $2,000 $0 Average Price Level Cost of Federal Government Data Source: Bureau of Labor Statistics, Bureau of Economic Analysis

1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Annual Cost per Person $12,000 $10,000 $8,000 $6,000 The average price level has risen 700% since 1954. The per-person cost of the Federal government has risen 3,000% since 1954. The cost of health care has only risen 2,000% since 1954. $4,000 $2,000 $0 Average Price Level Health Care Cost of Federal Government Data Source: Bureau of Labor Statistics, Bureau of Economic Analysis

Fine! The government spends a lot, but it s because of wars, NASA, subsidies to oil companies, [fill in your favorite evil]

2013 Federal Budget Discretnry. Spending Everything Else Defense Departments of Agriculture, Commerce, Education, Energy, HHS, HUD, Interior, Justice, Labor, State, Transportation, Treasury, Veteran Affairs, etc. Food stamps, unemployment, child nutrition and tax credits, supplemental security for disabled, student loans Other Mandatory Net Interest Mandatory Spending Entitlements Social Security, Medicare, Medicaid Data Source: The President s Budget for Fiscal Year 2013, Office of Management and Budget

2013 Federal Budget Everything Else Balance the budget, don t cut social programs Cut the defense budget by 50% and every other discretionary budget by 100%. Defense Other Mandatory Net Interest Entitlements Data Source: The President s Budget for Fiscal Year 2013, Office of Management and Budget

Conclusion Counting unfunded liabilities, the government is bankrupt now. Excluding unfunded liabilities, it is likely that the federal government will be bankrupt within 25 years. Mathematical constraint: Not enough rich people to tax to raise enough revenue to balance the budget. Political constraint: Too many people benefit from redistribution to allow politicians to curtail spending.

Why Should You Care? Today s college students will end up feeling significant financial pain: Higher taxes. Reduced government services. Reduced Social Security retirement benefits. Reduced ability to build up private retirement.

A Ray of Hope We could have a balanced federal budget within 5 years. Cut all spending by 10% this year no exceptions. Hold spending constant for 4 years don t even adjust for inflation. At the end of year 5, the budget will be balanced. Thereafter, restrict spending increases to the growth in real GDP.

Deficit Day to Bankruptcy Day April 2014 copies of this presentation can be found at

We have to do something! The rich are getting richer while the poor get poorer!

U.S. Households According to Income 30% 25% 20% 15% 10% 5% 0% Under $15,000 $15,000 - $25,000 $25,000 - $35,000 $35,000 - $50,000 $50,000 - $75,000 $75,000 - $100,000 Over $100,000 Incomes are in 2009 dollars. 1970 1980 1990 2000 2009 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

wtf?

Inequality and the Gini-Coefficient Line up people from poorest to richest. Total income = $1 million These people earn a total of $300,000 These people earn a total of $200,000 These people earn a total of $400,000 These people earn a total of $100,000

Inequality and the Gini-Coefficient Line up people from poorest to richest. Total income = $1 million These people earn 30% of all income. These people earn 20% of all income. These people earn 40% of all income. These people earn 10% of all income.

Historically, how has the economy reacted to stimulus spending?

RGDP per Capita Growth More economic activity Stimulus Spending and Economic Growth 4% 3% 2% 1% 0% -6% -4% -2% 0% 2% 4% 6% -1% -2% -3% More government spending -4% Change in Federal Outlays as % of GDP

RGDP per Capita Growth More economic activity Stimulus Spending and Economic Growth 4% 3% 2% If stimulus spending 1% worked, we should see a relationship like this. 0% -6% -4% -2% 0% 2% 4% 6% -1% -2% -3% More government spending -4% Change in Federal Outlays as % of GDP

RGDP per Capita Growth 1 Year Later Stimulus Spending and Economic Growth (1954.1 to 2011.1) 4% 3% 2% 1% 0% -6% -4% -2% 0% 2% 4% 6% -1% -2% -3% -4% Change in Federal Outlays as % of GDP Increased government spending does not appear to increase economic activity one year in the future. Data Source: Bureau of Economic Analysis, National Income and Product Accounts

Maybe stimulus spending s effects are cumulative. What is the cumulative effect?

RGDP per Capita Growth (4QMA) Stimulus Spending and Economic Growth (1954.1 to 2011.1) 3% 2% 2% 1% 1% Increased government spending appears to have a negative cumulative effect over 4 quarters. 0% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% -1% -1% -2% Change in Federal Outlays as % of GDP (4Q Moving Average) Data Source: Bureau of Economic Analysis, National Income and Product Accounts

Even if stimulus spending worked in theory, the government wouldn t get its timing right.

Growth in Per Capita Real Federal Spending (annualized) Can the Government Get the Timing Right? 2% 1% Recessions begin here 50% of recessions are over by now 0% -1% t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12-2% -3% -4% -5% 25% of recessions are over by now 75% of recessions are over by now -6% -7% Quarter Relative to Recession that Began in Quarter t