No Minister

Posts Tagged ‘Economic Disasters

Stagflation and pretty graphs?

For two decades after the end of WWII, economists, bureaucrats and politicians were pretty sure that they’d nailed the problems of controlling a capitalist economy.

The ruling theory was Keynesianism, named after the famous economist John Maynard Keynes, whose key insight in the 1930’s was that in times of economic recession, and especially depression such as The Slump of the 1930’s, governments should not cut back on their spending but increase it.

Prior to that governments had always taken the same attitude towards a shrinking economy that households and businesses did: you cut spending in line with your falling revenues, tax in the case of government. Keynes argued that this was the wrong thing for governments to do; they were different because they controlled the creation of credit so debt was not the same threat to them. They could go into debt, perhaps quite a lot of debt, and keep spending money to keep the economy afloat until the private sector came out of its shell and started investing and spending again. The idea was not so much to inflate the economy as to stop a blackhole effect where the shrinkage fed on itself.

At least in the USA under FDR from 1930 on, and here in New Zealand under the First Labour government, the theory seemed to work although there were a few problems with the argument in that period:

  • The NZ economy was already recovering by the time Labour gained power in 1935 and its Finance Minister Walter Nash, although pushing big increases in spending, never let NZ go into the sort of debt Keynes proposed.
  • The US recovery stalled completely in 1937, with unemployment rising to 17% again. FDR’s own Secretary of the Treasury was appalled at the result after so much money had been blown. In the end it was the industrial powering up for WWII that got the economy growing and flattened unemployment.
  • Australia and Britain simply never took the Keynesian approach, yet there was no evidence that their depressions were any worse, nor their recoveries any slower than those of the US and NZ.
  • In 1946 Keynesian economists were terrified at the prospect of eleven million military men returning home to a nation where the government was already cutting spending in the form of ending huge military contracts for tanks, planes and guns. Their fears grew when a newly installed Republican House and Senate promptly cut spending even further in 1947. And from a GDP approach you could also see their point as it contracted by an incredible 11.6% in 1946 and another 1% in 1947. By contrast it shrank by 12.9% in 1932. But far from a second Great Depression the post-war US economy took off and kept powering away, with only occasional mild recessions for more than twenty years.
  • The so-called “neo-Keynesians” of the Kennedy Administration, figured that if Keynes theory could reduce unemployment down to 5% there was no reason why more Keynesian stimulus couldn’t soak up that last portion. An economy running at 100% all the time. BZZZZZTT: hitting-the-edge-of-the-envelope time again and Hello, late 60’s US inflation.

Still, the Keynesian theory settled in as Western governments coped with those mild recessions by following the formula of increased spending during a recession, as well as Central Banks dropping interest rates. It all seemed to work, even as Western Economies started to get changed by all this government intrusion.

What is neo-liberalism? Who are Reagan and Freidman?

To be fair to Keynes he always made it clear that when the economy started growing again governments should ease up on the increased spending and start paying down their debt in preparation for the next economic downturn. Suffice to say that those aspects have been increasingly ignored.

From the mid 1960’s on, it all began to turn pear-shaped. In the USA inflation began to take off with the impact of all the spending on the Vietnam War and LBJ’s Great Society programs (also Kennedy’s neo-Keynesians mentioned earlier). The Federal Reserve tapped the interest rate brake, government spending under Nixon slowed slightly – and caused a mild recession in 1970. Releasing the brakes on both factors, the economy started growing again, but so did unemployment and inflation, something that was not supposed to be able to happen together. It got worse when recessions hit again and inflation and unemployment kept climbing through the 1970’s, with only occasional and temporary drops.

Thus was born the word “Stagflation”, followed by people paying less attention to Keynes and more to the monetary theories of Milton Friedman, as well as the economic control critiques of Friedrich Hayek from decades earlier, together with the associated politics of Reagan and Thatcher (and here in NZ, Roger Douglas, Australia with Bob Hawke) as they tried to reduce government influence in the economy.

It must be pointed out that despite all the privatisations, de-regulations and fighting over those issues, when it comes to the Big Basics of government spending and debt, it’s as though nothing has changed.

Certainly with the rise to power in the 2000’s of the likes of Bush, Blair and others, plus the shocks of things like the NASDAQ crash of ’99/00, the 9/11 attacks and of course the Great Financial Crisis of 2008, the world of Big Government spending has returned in full force.

The Great Chinese Sinus AIDS pandemic of 2020 just added rocket fuel to it all.

Amidst all this – and I’ve covered much of it already in these posts…

This is not going to get better – Feb 2019

The Great Crash of 2034 – June 2020

$5,630,859,000,000 – August 2020

… the fact was that in each of these situations in the last twenty years inflation did not take off, and while the economy recovered far more slowly than the stimulus spenders of Obama’s time had hoped for, it did at least grow, and unemployment kept going down while inflation was nowhere to be seen. These happy times became even happier under Trump as the economy boomed through 2018/19 before hitting the Covid lockdowns.

With the slow (too slow) unlocking of the economy many people figured that things would get back to normal rapidly. Yes, the Cassandra’s were still harping on about the fantastic increases in government spending, government debt and government credit creation – but we’d heard all that before.

In the case of the GFC it appears that much of that credit creation did not get into the pockets of consumers, being swallowed up by the banks instead – who did actually manage to pay Uncle Sam back for the TARP program, with interest too. Noted Keynesian economist Paul Krugman was angry that the 2008-9 stimulus programs were so small: he argued for programs in the range of $2-3 trillion and for it to go straight into the pockets of consumers.

It took a decade but that’s exactly what the $2.2 trillion CARES Act did in early 2020, followed by smaller ($900 billion) spending programs in late 2020. Then came the $1.9 trillion American Rescue Plan under Biden.

There may be more to come, with the proposed $2.3 trillion American Jobs Plan and the $1.8 trillion American Families Plan.

Krugman must be beyond joy at this moment.

Of course the thing about Cassandra was that she was telling the truth, and so in the Year of Our Lord 2021…

CNBC

Dow Jones estimates had been for 1 million new jobs and an unemployment rate of 5.8%.

New jobs were 266,000 and unemployment rate rose to 6.1%.

NASDAQ news:

The consumer sentiment index unexpectedly crashed to 82.8 in May from 88.3 in April. The decrease surprised economists, who had expected the index to rise to 90.4.

“Unexpectedly”! I always love that. Perhaps if those economists had paid a visit to a US timber yard or looked at the incredible increases in commodity prices across the board they might not have been so surprised about consumer confidence. Massive and rapid increases in prices tend to do that, of which the M2 chart above is merely one indicator. Here’s a better one.

Too much money chasing too few goods: supply vs demand. The oldest rule in the economic theory book. The only question is whether the US is going to add to the demand with those spending programs?

Of course, looking at this history of the last twenty years, it may not actually make any real difference to the path the USA is on, except possibly to act as a trigger point. As always the question is whether we’ll know that the trigger has been pulled. Mixing metaphors, we can be certain that a fuse has been lit.

Written by Tom Hunter

May 17, 2021 at 10:43 am

$5,630,859,000,000

That’s what the US government has spent in the first ten months (October to July) of this fiscal year.

It hardly needs to be said that this is the largest amount of money that the government has ever spent.

The good news is that they collected $2,823,564,000,000 in taxes, also a record.

That’s also the bad news because of course it means that they’ve set a record deficit so far. Those “trillion dollar deficits” of the early Obama years?

HA! This year’s deficit is $2,807,295,000,000: a $2.8 trillion deficit. They’ll likely beat the $3 trillion mark before the fiscal year ends Sep 30.

The big spending components were:

  • $1,005,897,000,000 – Department of Health and Human Services
  • $ 915,775,000,000 – Social Security
  • $ 540,442,000,000 – Department of Defense spent
  • $ 309,415,000,000 – Net Interest

The following graph of inflows and outflows shows that this is an exceptional year, as it is for all nations, with that huge “Income Security” payout to try and compensate workers for their jobs being shut down by order of the fifty state governments – the extent of shut down differing by state. But even taking that element out we’re still talking record deficits and ones that will likely continue for years now.

The proponents of Modern Monetary Theory don’t see a problem with this of course, and it makes arguments about it almost a moot point, since the USA is effectively practising it right now. But they can only do this because, unlike a little nation like New Zealand, their currency is basically the world’s currency.

I don’t see how this can go on. But then I’ve been saying that for years now and somehow it does. Perhaps the figures just don’t mean anything to ordinary people any longer? Perhaps they don’t think it will affect them: that when the day of payment comes they’ll simply refuse and allow the institutions of federal government in far-off Washington D.C. to collapse?

See also:

The Great Crash of 2034

This is not going to get better.

Written by Tom Hunter

August 16, 2020 at 9:21 am

The Great Crash of 2034

One of the first things I wrote about here at NoMinister was an article on the disastrous debt situation in the USA, This is not going to get better.

Amidst the charts of tax revenue vs rates and the vast, unfunded liabilities that lay in America’s future, courtesy of Social Security, Medicare and Medicaid – “these three giant machines running on automatic” – I wrote the following:

The good news is that government revenue is increasing, likely hitting 16.5 percent of GDP this year, increasing to 17.4 percent in 2025, and 18.3 percent of GDP in 2029. Of course this is all built on economic models and we know how those go with assumptions of economic growth rates and so forth. For all the talk about econometric models the reality is that they’re often little different to the spreadsheets ordinary people put together. So they’ll contain smooth changes from month-to-month or quarter-to-quarter. But did anybody throw in even a bog-standard recession, something just on the order of the 1990-91 deal, with a couple of % GDP foregone?

And here we are. And we’re not looking at a 2% GDP drop but probably something much worse courtesy of government reactions to the Wuhan Flu.

You can look at that old article to see the histories of US income tax revenue vs the highest income tax rate or corporate tax revenue vs corporate tax rates, but here I want to focus on US spending and then debt, starting with this chart published just last year in 2019.

Note the sidebar of assumptions underpinning this already frightening scenario: “no more wars, no recessions”, and so forth. Note also that the biggest increase in spending comes from non-discretionary spending, courtesy of the Big Three Machines mentioned earlier.

At the same time there was an article published that looked into a future much closer than 2049, The National Debt Death Spiral:

According to the U.S. Treasury Department’s Office of Debt Management, the U.S. government is just five years away from the point of no return.  With the national debt spiraling quickly out of control, there are only a few years left before every single dollar the government borrows will go toward funding interest payments on the national debt.

Interest payments only: not for paying the debt down. This is Ponzi Scheme territory. More specifically it’s the tipping point for when the scam starts to collapse. It’s also why you can look forward to a temporary future of near-zero, zero or even negative interest rates: “temporary“.

And that’s just the Federal situation. There are a number of territories and smaller cities that have already plunged through this event horizon :

In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.

Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.

Larger cities like Chicago are rapidly approaching the same point, with their debt now rated at Junk Bond levels, and the state of Illinois unable to help because they’re in the same shape.

And then there’s the wider economic problem that derives from the government spending priorities:

A couple of years ago there was somewhat of a kerfuffle in the more sober precincts of the MSM when a story circulated that after his economic advisors presented these post-2024 debt tipping point arguments and data to President Trump his response was (paraphrased): “I won’t be President by then so what does it matter?“.

Naturally the articles lambasted Trump for this selfish and cavalier attitude to spending and debt, but that outrage only lasted a day because everybody knew the terrible truth.

  • It’s a bi-partisan attitude in D.C;
  • almost every politician there (bar Rand Paul and a few House members) is in on it;
  • all of them are too terrified of the fallout that would happen from trying to fix it.

Trump’s 2020 budget produced earlier this year went on to prove the point, as this article demonstrated with comparisons of the MSM coverage of Trump’s budget and the actual forecast numbers. First the MSM headlines:

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Holy shit! Trump was proposing huge spending cuts in domestic programs? That’s great news!

If only it was true.

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This would be the same under any President and any Congress, courtesy of those screaming headlines. Nobody dares to cut spending; even the “cut” of $4.4 trillion noted above was merely a plan to spend less than the baseline spending increases assumed at the start of the budget process.

And remember that all of the above was before the latest economic crisis hit the USA, which has produced the following astounding graph from the US Central Bank, the Federal Reserve:

As you can see the Fed had only just started to finally rid its balance sheet of the debt piled up from the GFC before the Chinese Lung Rot hit the fan. As this article pointed out:

The federal debt had topped $24 trillion for the first time on April 7, 2020.

It then climbed another trillion dollars in just 28 days, topping $25 trillion for the first time on May 5.

Only 35 days had elapsed from when the debt topped that $25-trillion threshold on May 5 to yesterday, when it topped $26 trillion for the first time.

It took about two hundred years for the USA to pile up $2 trillion in Federal debt, hitting that figure in 1983.

Now it has taken just 63 days.

The following chart shows how the debt load is not only increasing but even the rate of acceleration, as is the case with Ponzi schemes. No private business would see this as anything than the stuff of sleepless nights between daytime nightmares.

I’ll finish with this quote from John Stossell, which I especially like because it takes my original article title of “This is not going to get better” and sharpens it:

“We have piled deficit upon deficit, mortgaging our future and our children’s future,” warned Ronald Reagan. “We must act today to preserve tomorrow.”

Bill Clinton said, “We’ve got to deal with this big long term debt problem.”

Barack Obama called driving up the national debt “irresponsible” and then proceeded to do exactly that.

Donald Trump complained that Obama “doubled” the nation’s debt. But now, under Trump’s presidency and the new CARES Act, our debt will grow even faster.

This will not end well.

Even a so-called V-shaped economic recovery would not change this very much.

For all the talk of pandemics and now riots it is this story about the USA that should truly scare you. It is not Antifa or BLM or any other bunch of fanatics and idiots that will destroy the USA but the age-old problem of debt. Take your pick as to the crunch date, mine is 2034!

One of Adam Smith’s famous economic observations was made to a pupil concerned that the massive growth of debt in Britain during the Napoleonic Wars would ruin the nation. That debt would eventually reach 200% of GDP but Smith assured the student that “there is a great deal of ruin in a nation.“, and that proved to be the case, but not without a lot of pain being inflicted in the following two decades.

Same here via Rand Paul’s “Pennies Plan” alternative Budget, although I can’t help feeling that the USA is pushing the outside of the envelope awfully hard on Smith’s maxim.

Written by Tom Hunter

June 14, 2020 at 7:00 pm

A picture is worth a thousand graphs

I wish I’d seen this graphic when I published Visible Death vs. Invisible Death a few days ago.

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Produced for those complaining about articles that have too many words, numbers and graphs.
 

Having said that, here’s a very cool graph from Snopes of the progress of the virus. An interesting way of portraying the data, at least up to early April.

 

 

Written by Tom Hunter

April 28, 2020 at 11:14 pm

Visible Death vs. Invisible Death

One of the most famous economic essays ever written is That Which is Seen, and That Which is Not Seen, by 19th century French economist, Frédéric Bastiat. He introduced what he called the fallacy of the broken window, where the money spent to fix the window – paying the person who made the glass and the glazier who installed it – is seen, but other costs are not:

Frédéric Bastiat


But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”


It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.

The lockdown of New Zealand society to deal with COVID-1984 is presenting the same problem, except instead of money, the counting is in deaths.

The other day I looked at a report of the results from testing the epidemiological model used by the NZ governments’s health care advisors.

Buried within the report was a short section that made crude sensitivity estimates of the costs and benefits of the Lockdown across just one part of the NZ economy: building and construction. The report estimated the benefits of avoiding deaths and hospitalisations in that industry at $7.6 million and the cost at $3 billion (one month, 250,000 workers at $3000 per week).

The point of this was not to try and calculate precise numbers but to test the ranges and comparisons across different runs and sensitivities to get a handle on the possible cost/benefit. As the report said:

Of course, the benefit cost ratio of .003 is from just model run. Different, and plausible, assumptions can readily generate benefits that are a order of magnitude, say, ten or twenty times, higher than the $7.6 million. But it is very difficult to see how they could be over 300 times higher.

But what I was interested in was the assumptions had purloined from government sources (p. 25):

  • The value of a statistical life is $4.5 million;
  • The life years conversion factor is 0.10 for over 70s and 0.55 for under 70s;
  • The cost of an illness is $4000;
  • The cost of a hospitalisation is $30,000.

The value of a statistical life!

A précis of that report was linked to in an article of Michael Riddell’s Croaking Cassandra blog, Coronavirus economics. But there was another section of Riddell’s article looking at an unpublished (as yet) economic analysis that took a different bite at the cherry.

This analysis was performed by one of New Zealand’s leading academic economists, Professor John Gibson from Waikato University, and he decided to look at the Lockdown policy from the POV of how it might affect population-wide life expectancies in NZ.

The flu kills about 500 New Zealanders a year but it can kill more in a bad season like that of 2015, when 767 died from it. A season worse than that would be “flu shock” and Gibson picked a figure of 875 for that edge-case scenario. That produces a reduction in life expectancy of 0.14 years across the whole population.

Ten such shocks would therefore drop it by 1.4 years: that’s 8,750 dead people, which is in the range of the middle scenario of the Otago model for COVID-19 deaths.

In other words, in saving all those lives the lockdown could be expected to prevent the population life expectancy from dropping by 1.4 years, and more again if the third scenario of 14,000 deaths eventuated.

But at what cost? We’ve allowed ourselves to be bullied by shroud-wavers talking about preferring to make a buck over saving the lives of old people. But that’s a false choice and an emotional weapon wielded by people who don’t want their solution to be questioned. The fact is the lives will be lost as a result of the lockdown.

It turns out that life expectancy in New Zealand is more sensitive to changes in real income than is so for many countries.

In other words, a ten percent decrease in real per capita GDP reduces life expectancy by 1.7 percent. The most recent period life tables for New Zealand report that male life expectancy was 79.5 years and female life expectancy was 83.2 years, so 1.7 percent of the average of those two values is 1.4 years.
 

In other words, if real per capita GDP in New Zealand falls by ten percent due to the lockdown and other effects associated with Covid-19, life expectancy would be predicted to fall by 1.4 years.

And we could be looking at an annual GDP drop of more than 10%. By contrast, even going by the real worst-case death rate of New York City, currently 1,085 deaths per million, we’d be looking at a life expectancy drop of 0.93 years.

So even in that highly unlikely example the lockdown solution would still result in reducing life expectancy by an extra 0.5 of a year. The apparent kindness of doing everything possible to limit deaths due to Covid-19 would, instead, be killing more people by making them poorer.

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And we may not need to dabble in such statistical comparisons of invisible deaths anyway. As this article by six American doctors points out, the US hospital system has been so emptied out that doctors and nurses are being laid off and furloughed in droves:

Almost every hospital outside of the hotspots is empty. The dramatic reduction in healthcare utilization and capacity is by no means limited to small, country hospitals. Mayo Clinic is empty: 65% of the hospital beds at Mayo Clinic are empty, as are 75% of the operating rooms. This is the world’s premier medical center. If Mayo Clinic is empty, imagine how dire the situation is at smaller, community-based healthcare centers. Given the complexity of the patients referred to Mayo Clinic, its emptiness alone will have a significant negative impact on healthcare outcomes.

Same with this article written by Dr Scott W. Atlas, of Stanford University Medical Center:

Most states and many hospitals abruptly stopped “nonessential” procedures and surgery. That prevented diagnoses of life-threatening diseases, like cancer screening, biopsies of tumors now undiscovered and potentially deadly brain aneurysms. Treatments, including emergency care, for the most serious illnesses were also missed. Cancer patients deferred chemotherapy. An estimated 80 percent of brain surgery cases were skipped. Acute stroke and heart attack patients missed their only chances for treatment, some dying and many now facing permanent disability.

Same in Britain:

It’s chilling to know that many hospital wards, waiting rooms and car parks are now empty. Before this country was hit, only 800 of the NHS’s 4,125 critical care beds were vacant at one time. Now it’s 2,300. Even with some of the worst fatality rates in Europe, some hospitals now report being half empty since they paused almost all non-emergency work.

Richard Sullivan, a professor of cancer and global health at King’s College London, says: The number of deaths due to the disruption of cancer services is likely to outweigh the number of deaths from the coronavirus itself over the next five years. Cancer screening services have stopped, which means we will miss our chance to catch many cancers when they are treatable and curable.

And there are almost certainly deaths happening right now because of the focus on saving people from COVID-19:

Accident and Emergency chiefs in London are concerned that more people are dying of non-coronavirus-related illnesses than normal because they are reluctant to leave their homes and be a burden on their local hospital. They believe there has been a ‘sharp rise in the number of seriously ill people dying at home’. They report that dozens more people than normal are dying at home from cardiac arrests, for example, presumably because they do not want to impose upon our locked-down society and what is continually presented to us as a busy, stressed-out health service.

Spain:

In Spain, health investigators found a 40 per cent reduction in emergency procedures for heart attacks at the end of March compared with a normal period.

Australia:

there has been a ‘drastic drop’ in cancer and heart-attack patients presenting to the health services. In Victoria, health officials report a 50 per cent decline in new cancer patients and 30 per cent decline in cardiac emergencies. It is now feared that ‘coronavirus anxiety’ could lead to ‘more deaths from cancer and heart attacks’.

And back to NYC:

The New York Times published a piece on 6 April headlined, ‘Where have all the heart attacks gone?’. It was written by a doctor who likewise described hospitals in the US as being ‘eerily quiet’. He has heard from colleagues who are seeing fewer patients with heart attacks, strokes, acute appendicitis and acute gall-bladder disease than they would normally see.

In Britain at least they appear to have asked the question:

Matt Hancock, the health secretary, refuses to give a figure for the potential non-Covid fatalities from this catastrophe but the cabinet was told it could be up to 150,000 avoidable deaths.

I’ve seen no evidence that we asked that question of our public health experts, either inside government or outside. It cannot be possible that the same deaths are not happening here. We’re just not seeing them widely reported in the MSM or announced in the PM’s press conferences.

This is not going to get better!

The other day, Keith Hall, the Director of the Congressional Budget Office (CBO), dragged himself up to the US Senate for the usual sad recitation of simple financial facts that all the Senators, and the House members already know.

Well, some of them anyway.

Well, I’ll be a poor, sad bastard!

He had to sit in front of the U.S. Senate Budget Committee and talk about the CBO’s recently released report on the Budget and Economic Outlook for 2019 to 2029.

The good news is that government revenue is increasing, likely hitting 16.5 percent of GDP this year, increasing to 17.4 percent in 2025, and 18.3 percent of GDP in 2029. Of course this is all built on economic models and we know how those go with assumptions of economic growth rates and so forth. For all the talk about econometric models the reality is that they’re often little different to the spreadsheets ordinary people put together. So they’ll contain smooth changes from month-to-month or quarter-to-quarter. But did anybody throw in even a bog-standard recession, something just on the order of the 1990-91 deal, with a couple of % GDP foregone?

The reason that’s important is that the big factor for tax revenue is simply whether the economy is growing or not. Tax rates and tax types don’t actually have much of an impact, as the last 80 years of IRS stats will show, with regard to the top marginal income tax rate, which is a good proxy for lower-band income tax rates.

Basically, US tax revenue fluctuates around 20%, no matter what you do with “taxing the rich”. Same with Corporate Taxes:

What is a lot more predictable than revenue however, is government spending. It increases – relentlessly – and the only thing a recession in the model would do to such spending would be to increase it further and faster. That Keynesianism for you. According to the CBO, federal spending will increase from 20.8 percent of GDP this year to 23.0 percent in 2029, when revenue might be 18.3%. In other words, the already scary deficits are going to get scarier. We’re not far away from having a $1 trillion deficit each year – in a good economy.

The main drivers are “the aging of the population and the rising cost of health care,” which are hammering the three big welfare programs, Social Security, Medicare (healthcare over 65) and Medicaid (healthcare for low income). These three are giant machines running on automatic. Congress has discretion – control – over a small, and shrinking amount of the Federal budget. And even that portion has a lot of elements that are basically out of their control and just increase. A couple of years ago I saw one calculation that the actual portion of the budget truly controlled with decisions, amounts to about 17% – and will shrink to 7% in the next decade.

Medicare/Medicaid are the monsters. They took a couple of years to crank up after being made law in 1965 so spending figures are from 1967 to 2018 and in nominal dollars:

Medicare collects premiums and other revenue, hence the net figure. Still, that’s a growth rate for the two programs of 12% per year, for fifty one years. The US economy has never grown at that rate for even one year. There is no prospect of this changing so future payments are going to be difficult to meet. As explained by the Medicare Trustees:

“The present value of a future stream of payments is the lump-sum amount that, if invested today, together with interest earnings would be just enough to meet each of the payments as it fell due. At the time of the last payment, the invested fund would be exactly zero.” 

They calculate on a standard 75 year timeline and have that value at $33.5 trillion right now  – and there’s no cookie jar to raid. Other scenarios (infinite horizon) are argued to be more realistic, but the low-ball figure is scary enough.

Social Security has another $20+ trillion of unfunded liabilities on the 75 year time frame, but that can probably be managed, because the government controls both the revenue and spending. The last changes were in the 1980’s when President Reagan and Democrat House Speaker Tip O’Neill fought over, but ultimately agreed upon, myriad little changes to spending rates, adjustment rules, and the tax, to make it safe for another few decades. Such work will be required again soon, and should include the same gradual lift in eligibility age that other Western nations have implemented.

Medicaid‘s structure basically runs from year to year and the burden is shared with individual states, so unfunded liabilities are not its problem. But it too has to be paid for and while the Federal government has tried cutting rates paid for doctors and medical services, that’s just resulted in Medicaid patients finding no doctor, clinic or hospital to serve them.

Medicare has no such outlet: benefits cannot be specifically cut or even much changed, and there is no rationing system as with New Zealand Health or the British NHS – one other thing that the “Medicare-For-All” crowd never talk about. If it did have rationing it would become like Medicaid, which nobody boasts about. But even if such could be implemented – and Obamacare did cut Medicare rates over time – the Medicare Trustees warn of the result:

“By 2040, simulations suggest that approximately half of hospitals, roughly two-thirds of skilled nursing facilities, and over 80 percent of home health agencies would have negative total facility margins, raising the possibility of access and quality-of-care issues for Medicare beneficiaries”

Remember this roughly $50 trillion unfunded debt whenever anybody talks about the current Federal debt of $22 trillion. By the way, that infinite horizon analysis that’s endorsed by a large number of economists (incuding Nobel prize winners) produces an unfunded debt figure of $210 trillion.

The final cherry on top is the fact that as the debt rises, and as interest rates slowly return to normal, they’re going to drive up the federal government’s net interest costs, which this year sat at $364 billion. The Federal Reserve’s long-term average is about 5%: that translates to $1.1 trillion per year in interest payments alone.

And this is just the Federal level. I’ve not even mentioned the similar debts and unfunded liabilities of pension funds and healthcare schemes in the states, many of which are in poor shape, and some – like California and Illinois – frightening.

So where does all this end? It would be nice if the work started now, but the number of politicians willing to even broach these subjects in D.C., can be counted on the fingers of one hand. The rest don’t want to know and will continue to kick the can down the road. Admittedly the solution options are limited.

Forget just increasing taxes. The calculations already show that tax increases of 50%+ and spending cuts of 30%+ might produce enough money to plug the holes, but it’s highly doubtful that US voters would accept such unprecedented taxation or cuts, let alone both in concert.

And this is without considering some of the new doozies being dreamed up by D.C. politicians: the Green New Deal, a trillion dollars of student debt wiped, and of course, Medicare For All (MFA).

MFA won’t solve the problems unless it has rationing, and as the old British and NZ Labourites knew, that’s tough to do unless the government also owns the hospitals – and that assumes Americans will accept healthcare rationing. Moreover, there are already two such government owned and funded programs: Veterans Health Administration and the Indian Health Service. They’re both regarded as hideous disasters, so much so that laws have been changed to allow at least the VHA detainees to escape and spend their government funds on private providers.

In any case, it seems unlikely that the US government would spend more trillions buying out private hospitals and clinics. Nationalisation could be done but what sort of crash that would induce in stocks and bonds does not bear thinking about, and it would likely be killed by the courts. Very fine prescriptive controls over the private sector would require a huge bureaucracy, and would be even less effective than they’ve been in other industries.

Given the Federal nature of the USA, one answer may be to have many answers, with each of the 50 states allowed to experiment with different approaches. Some efforts have already been made with block grants for smaller welfare and healthcare schemes, but D.C. likes power so it’s questionable how far they’ll let states go. And the current problems in these areas in some states mentioned above, are not encouraging.

My crystal ball view is that while these systems are not going to collapse, they will be circumscribed at some point. Current estimates are that people in the 2040’s/50’s will get Social Security benefits at less than 80% of today’s pensioners. Medicare will certainly be below that. But that’s still better than nothing. At some stage – probably sometime in the 30’s/40’s – Gen Z and whoever follows them will realise the Ponzi nature of these Pay-As-You-Go schemes and have the voting muscle to override the remaining Boomers. They’ll ring-fence them for existing users and people about to retire, and force the development of private-public actuarial-based systems for both health and pensions.

This will all be very messy and clunky, but in a democracy there are no clean, one-shot solutions.

UPDATE I see one of our commentators has managed to use his lobed fins…

… to struggle on to land bearing some arguments that are worth addressing because of their prominence in Leftist mythology.

The budget could easily be reined in by reinstating taxes on the wealthy.

The long-term graph in the original article gives the lie to that BS, and that also applies to the other “wealth” taxes that applied at the time, on estates and such like, that I see Bernie is talking about bring back. Dear god, the old crank hankers for 1950’s America worse than Pat Buchanan.

The US “Defence” budget could be slashed 80% and that would still leave more than enough money for defence.

The 2019 US Defence Budget is $716 billion, so 80% of that would be $573 billion. Yowza!!! That almost pays for last years Medicare. The problem of course is that annual growth rate of 12% over the last fifty years. Let’s be generous and imagine that we can cut it to just 6% from now on. At that rate Medicare/Medicaid would eat up that annual increase in about 6 1/2 years.

Oh – and a defense budget of $142 billion would amount to about 0.6% of 2019 GDP, New Zealand is at about 1.1%. Modern warfare has long since wiped out the idea of massive cutbacks at war’s end and massive buildups when the next one starts. The stuff has to be there, ready to go or you lose.

Even at 0.6% GDP the sheer size of the US economy does buy more capabilities than NZ of course – but it would basically mean cutting the US military to the point where it could not defend the place, or sea trade routes, or anything overseas that it depends upon. And if your answer to that is an almighty cheer I invite you to think about what China, Japan, Taiwan, Indonesia and others would do in terms of military buildup as most of the US Navy and Air Force mothballed itself: I sure as hell would not want to be in those areas to find out, and I doubt the USA would escape the consequences. Still – it would lead to massive increases in Australian defence spending and increased taxes for you, so Yay!.

Lastly, for all the endless Lefty yammering about US defence spending, the fact is that it has changed little since the early 1950’s in constant dollars, and has had substantial cuts on four occasions.

It has also constantly reduced as a % of GDP (not to mention as a proportion of the Federal Budget).

None of those things are true of Social Security/Medicare/Medicaid.

Written by Tom Hunter

February 5, 2019 at 7:02 pm