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Over a Cliff: Party Like It’s 1999

by Ouida on October 8, 2013


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This is a pretty tough post for me to write. Partly because I am taking on a hot topic and I really want to do it justice but also because while doing the research for this post, I came to understand that the Republicans in Congress are a lot of things, but interested in wise governance of this country is not one of them.

I have to say that I have asked myself how did things get so crazy?  Ultimately I realize that I have to leave the pundits and the historians to answer that question.

I stopped blogging 3 years ago because I got feedback that my blog, with its economic focus was just too much.  Yes, we seemed to be teetering over the edge, but why blog about it.  As I transition through middle age, maybe I will blog about menopause, but not today.

I’m still interested in human behavior and economics and I am also crazy enough to think that if people knew enough they would demand something better from their elected officials.

Right now we have a group of people who seem bound and determined to destroy our country, push millions of people into economic hardship and ruin the reputation of our country.  A country that I love.

We have just ended day 8 of the government shutdown. At our hospital we have emergency meeting after emergency meeting as we discuss contingency plans to reduce services to patients.  Doing the research for this blog post I realized that the Republicans are simply lying to the American people.  Power is the only thing they want…period.

I have spent the last several days looking over the United States Financial Statements since 1997.  I wanted to know what were these big budget surpluses of the 1990s and I wanted to know how dire our situation is.

Here is what I learned.  The Republicans are right, our balance sheet is awful. But they are lying when they don’t discuss restructuring Medicare and Social Security as the solution. They are lying when they say short term budget deficits are the root of all evil. They are lying when they state that the Affordable Health Care Act will worsen deficits when the General Accounting Office (the accounting arm of the legislative branch of government) states that it is the one  piece of legislation enacted that may stem the tide of rising health care costs.

The other reason this post is hard for me to write is simple. I am a fiscal conservative. I even voted Republican back in the day. So doing the research and integrating the information into my consciousness was akin to a slap across the face.

So let’s start and see where this takes us.

When we talk about US budget deficits we are really talking about two things:

1) The deficit created when expenses exceed income

2) The deficit created when liabilities exceed assets

All across America, families meet at the dinner table for fellowship and to pay bills.  They match income with expenses.  When expenses exceed income, the excess expenses go on a credit card. When income exceeds expenses, the excess income is retained as savings.  It is possible for a family with a budget surplus each month to still have a net negative position.  The way that works is when a family saves regularly, yet carries long term debt in the form of student loans, a mortgage, a car or any other way of taking on debt you can think of.  So looking at a family’s financial picture involves looking at the income statement which is income verses expenses and the balance sheet which is assets verses liabilities.  Some families carry credit card debt.  For those that do, sometimes the smart play is to move that debt from one card to another to keep borrowing costs low while you pay the debt.  For the most part we think that is a good thing to do.  It is why credit card companies offer ultra low introductory rates to allow someone to control the interest they pay on outstanding debt, but also to essentially use one card to pay off another.  Financial Gurus actually endorse this strategy as long as it is used as part of a debt-reduction plan. The credit card company is actually betting that the family will never pay off the debt, but that is another blog post.  Too many credit cards and the family cannot take care of its long term debt obligations, but if this family has a $100 K income and a million dollar mortgage, it doesn’t matter how many budget surpluses they have, they won’t be able to address the million dollar mortgage.  That mortgage will be the guerrilla  at the dinner table!  If you use one credit card to pay another, that is called rolling the debt over. When you refinance your home to pay off credit card debt, that is called rolling the debt over and when you refinance your home to pay off a first and second mortgage that is called rolling the debt over.  Notice that each of these maneuvers is aimed at address debt that has already been incurred.

This is the United States Financial Statement in a nutshell:  It is just a version of a family’s (albeit a very dysfunctional one) finances on steroids.  The only difference is that it completely controls its own debt and prints its own money.  Nice work if you can get it.

So let’s look at the budget since 1997:

You like?  I did this myself.  This is in trillions of dollars by the way.

To me a budget deficit occurs when expenses exceed income a surplus occurs when income exceeds expenses.  Not so with the government because Uncle Sam holds money in different accounts for different purposes that it may or may not have to spend at any given time, but will have to spend at some point in the future.  The way to think about this is the average family has $1000 dollars in income. They spend $1050 dollars. They should have a budget deficit of 50 dollars, but Mom owes Sally the neighbor $100 dollars and she just happens to have that money on hand. She hasn’t yet given it to Sally.  Because Mom still has the $100 bucks, the family’s budget deficit of 50 dollars becomes a budget surplus of 50 dollars even though that $100 bucks does not belong to the family.

Well Uncle Sam had a number of accounts that they could use to offset the deficit.  Some of the money was funds set aside for Veterans among others. You will notice that those funds were used to overstate budget surpluses and blunt budget deficits.  The bars in red are represented by the straight-up calculation: income minus expenses. The bars in blue are what happens when Uncle Sam uses the money it is holding for other purposes to offset the deficit.

OK so like, yeah, the massaged 2012 budget deficit was 1.089 Trillion dollars, less than 2011. But let’s look at the overall trend. Ick!

Then let’s look at Uncle Sam’s net position:

This is cumulative budget deficits along with known recurring financial obligations.  Now here is the thing:  The GAO actually wrote in its 1999 financial statement that Y2K was the greatest threat to America.  Of course if only they had known about 9/11, Iraq and Afghanistan, the d0tcom bubble and the financial collapse.  I will leave you to add to the map who was President when and the serious events going on in America at each year.  Truth is that government really is bigger. The Department of Homeland Security did not even exist before 2001 and it has added $600 billion dollars directly to the Federal Deficit.  Medicare part D added 5 Trillion dollars to the long term federal debt and it is essentially off book, because there is no line item cost for Medicare part D.

The US Financial Statement describes, Social Security, Medicare Parts A, B and D as “Total present value of future expenditures in excess of future revenue”. This category used to be called “unfunded obligations” .  In 2011 that number was 33,830 Trillion dollars.  In short that is money that we owe, that we don’t, and most likely won’t, have.  These entitlement programs are our guerrilla mortgage! The payroll taxes collected for Medicare haven’t been sufficient to support the expenses of the program for some time. Payroll taxes collected are set to be insufficient to support current Social Security payments some time during the next decade.

Let’s look at debt held:

And interest payments on that debt:

Paul Krugman, Economics Princeton and Nobel Laureate and uber liberal, happens to be right here, with borrowing costs at historic lows, the government is paying no more for its debt than it did in 1997 despite the 2-3 fold increase in debt burden.  Uncle Sam has benefitted greatly from the Federal Reserve’s monetary policy since the financial collapse.

What does all this have to do with the debt ceiling?  One of my friends asked that if we were trying to get out of debt, why raise the debt ceiling?  Any person who has ever gotten out of debt knows that they have to go through a period of economic austerity to make debt reduction possible. In most cases they have to restructure debt, negotiate with creditors for lower interest rates, refinance debt or move debt from one financial instrument to another.  All of these maneuvers are designed to help address the debt they have already incurred. The irony is that in order to address that debt, you have to have the capacity to borrow more because each new financial maneuver is considered a new loan.  So your friend loans you 100 dollars. You agree to pay 10 cents per month.  A fee you can easily pay. The term of your loan is one year. At the end of that year you can either return the 100 dollars to your friend or not.  If you don’t have the cash to pay your friend, you may borrow 100 dollars from someone else to pay your friend and pay that new person 10 cents a month.  Your overall debt burden hasn’t changed but you have rolled the debt to a new loan.  What if you couldn’t borrow 100 dollars from someone else and did not have the 100 dollars to pay your friend?  You would default and the next time you wanted to borrow you might have to pay one dollar per month interest.

The debt ceiling simply allows Congress to pay the debts it has already incurred.  Starting on the 2001 financial statement you can see something interesting.  There is a line item that says  ___Trillion bonds paid, ___ Trillion bonds purchased. That is the government rolling its debt.  Basically IOUs from the government come due each year.  The government pays those creditors by simply rolling that debt to a lower interest credit card:   Selling new bonds and using those funds to pay off bonds that have matured. Without this flexibility the government would have to use its income, the same income it uses to make Social Security payments, pay Veteran’s benefits, etc, to service its debt.  Since 1997 the government has taken in anywhere between 1.7 and 2.8 Trillion in revenue.  Without an increase in the debt ceiling, government would shut down while all available resources would be used to service debt.  US Income is really not sufficient to pay back all bonds that mature at any given time so default would happen.

Why do I say the Republicans have lied to the American people?

They have to acknowledge what the long term driver of our deficit is:  The entitlement programs particularly Medicare.  David Wessel in Red Ink wrote at length about the long term impact of health care on our government’s bottom line. Long before the Affordable Health Care Act, the Federal Government was the largest health care provider when considering all its programs: Medicaid, Medicare, The Veteran’s Administration, The Indian Health Service, The NIH, The CDC.

They have willingly told the American People that the Affordable Health Care Act will burden an already strained Federal Budget and as such it is bad law.  This is not the truth. The GAO is essentially the accounting arm for Congress. If anything they would be biased toward the legislative branch.  What follows is taken from the 2011/12 combined financial report:

“The financial projections for the Medicare program reflect substantial, but very uncertain, cost savings deriving from provisions of the Affordable Care Act. However, it is important to note that the improved results for HI and SMI Part B since 2010 depend in part on the long-range feasibility of the various cost-saving measures in the Affordable Care Act–in particular, the lower increases in Medicare payment rates to most categories of health care providers. Without fundamental change in the current delivery system, these adjustments would probably not be viable indefinitely. It is possible that health care providers could improve their productivity, reduce wasteful expenditures, and take other steps to keep their cost growth within the bounds imposed by the Medicare price limitations. For such efforts to be successful in the long range, providers would have to generate and sustain unprecedented levels of productivity gains–a very challenging and uncertain prospect. A transformation of health care in the United States, affecting both the means of delivery and the method of paying for care, is also a possibility. The Affordable Care Act takes important steps in this direction by initiating programs of research into innovative payment and service delivery models, such as accountable care organizations, patient-centered “medical homes,” improvement in care coordination for individuals with multiple chronic health conditions, improvement in coordination of post-acute care, payment bundling, “pay for performance,” and assistance for individuals in making informed health choices. If researchers and policy makers can demonstrate that the new approaches developed through these initiatives will improve the quality of health care and/or reduce costs, then the Secretary of Health and Human Services can adopt them for Medicare without further legislation. Such changes have the potential to reduce health care costs and cost growth rates and could, as a result, help lower Medicare cost growth rates to levels compatible with the lower price updates payable under current law.

It concludes:

The United States took a potentially significant step towards fiscal sustainability in 2010 by reforming its system of health insurance through enactment of the ACA. The legislated changes for Medicare, Medicaid, and other health coverage hold the prospect of lowering the long-term growth trend for health care costs and significantly reducing the long-term fiscal gap. Furthermore, enactment of the Budget Control Act in August 2011 placed limits on future discretionary spending and established a process to further reduce projected deficits by at least $1.2 trillion from 2013 through 2021. But even with the new laws, the projections in this Report indicate that if policy remains unchanged the debt-to-GDP ratio will continually increase over the next 75 years and beyond, which implies current policies are not sustainable and must ultimately change. Subject to the important caveat that policy changes are not so abrupt that they slow the economic recovery, the sooner policies are put in place to avert these trends, the smaller are the revenue increases and/or spending decreases necessary to return the Government to a sustainable fiscal path.”

The GAO cites two pieces of legislation, the Affordable Health Care Act being one of them, that may help improve the long-term financial outlook for America.  The ACA is simply not the DUD the GOP claims it is.

Sure, creating budget surpluses is the way to pay down our short term debt and there needs to be intelligent discussion about that, but threats posturing and wrecking the good name of the United States Government should not be part of that discussion.  Further given our 24/7 news cycle it is simply irresponsible to entertain default.  A family cannot reasonably expect to sit outside a financial institution and discuss not paying a debt it already owes.  What do you think would happen if they decided to march right in and take out a loan?  If they could borrow at all would they get the most favorable interest rate?

In efficient markets simply talking about default should cause interest rates to spike and cause a market selloff….oh wait.

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