Government Spending

Did IMF Say USA Is DOA?

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America's future.

Recent International Monetary Fund statements on U.S. fiscal solvency have been alarming. But do they point to a future debt of $202 trillion?

Boston University econ prof. Laurence J. Kotlikoff has put together some pleasingly apocalyptic documentation:

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: "Directors welcomed the authorities' commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP."

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: "The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates." It adds that "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP."

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It's also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

It's from the CBO's alarming Budget Outlook that Kotlikoff builds his case for the $202 trillion fiscal gap, then ends with a malediction against both demand siders and supply siders: "Our country is broke and can no longer afford no- pain, all-gain 'solutions.'"

I'm inclined to share in Kotlikoff's skepticism that supply-side solutions—absent an almost total spending cut that would be politically impossible—can close this gap. The U.S. Treasury's credit should by all logic be shot at this point, so it's hard to see how a repeat of Reagan-era tax cuts, currency stabilization and borrowing to cover the deficit could still be applied. While there are many nice things to say about the Reagan Administration, it ended with public debt much larger than it was at the beginning, and it arguably accustomed Washington to an insidious type of government growth that seemed painless only because it was continually rolled over into bigger debt. I'd still say Reagan made the right bet: The U.S. economy was resilient enough to handle a much bigger debt load at the time. That time is over.

I should note, however, that the evidence should be showing up in the cost of public debt service, and so far the evidence has not been found: Yields on 10-year Treasury notes are so low they're practically giving them all away. But the IMF's Selected Issues paper predicts a spike in interest rates is on its way:

In sum, analysis both on the basis of investor portfolios and saving-investment balances suggest that, on current policies, the sizeable projected increases in U.S. public debt will likely put upward pressure on government borrowing costs in the medium term.

There's a silver lining here: the prospect that increasing costs for public debt, coupled with popular hatred of inflation and the political weakness of people my age as we approach retirement, could actually force some radical changes in the old-age benefits that are at the center of all these horrible statistics. The apocalypse, like Achilles, is always just about to overtake us, but never quite does. 

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  1. I like Laibach’s cover better. http://www.youtube.com/watch?v=W4D7L-PBmRc

  2. and the political weakness of people my age as we approach retirement

    how old are you, Tim?

  3. “”Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. “”

    Isn’t that a short sighted statement? If we double those taxes it would damage consumer spending and jobs in a big way. No?

    1. Obama could mandate that wealth stay equal to its pre-tax doubling.

    2. The relationship between tax rates and receipts is approximately that of carbon dioxide to surface temperatures. There may be one, but it is highly complex, nonlinear, and usually treated as a coefficient to make the numbers support the argument.

      1. Unfortunately, the relationship between tax revenues and government spending is well established.

  4. What difference does it make whether it’s $13 trillion or $200 trillion?

    Neither amount can we pay back.

    1. It is the difference between 10% inflation and 40% inflation. Devaluing the dollar, that’s how you can pay them back… Looking forward to your $90 happy meals?

      1. No, but now I’m looking forward to the sequel to Super Size Me.

        1. Let’s see Spurlock get fat at those prices, Ha!

    2. Neither amount can we pay back.

      I agree, and it has to make you wonder about the people who are stupid enough to continue buying the debt of our insane government.

      1. that would probably be us.

      2. P.T. Barnum said “There’s a sucker born every minute” more than a century ago. IIRC, he became quite wealthy.

  5. RE: The Picture

    That looks like a totally badass future.

  6. America: Two weeks at the Four Seasons in exchange for two years in Turkish prison.

    1. Do you like movies about gladiators?

  7. “While there are many nice things to say about the Reagan Administration, it ended with public debt much larger than it was at the beginning, and it arguably accustomed Washington to an insidious type of government growth that seemed painless only because it was continually rolled over into bigger debt.”

    As Cheney put it “Reagan taught us that deficits don’t matter.” Don’t blame Dick. He was just trying to be like Ronnie. What we need, I guess, is Newt & Bill, Part II, minus the impeachment.*

    *And don’t forget George I. He helped pick up Ronnie’s tab, which is probably why he lost. Moral: Never be too conscientious.

    1. I’m trying to remember who bashed Bush 1 for raising taxes.

      1. *whistling*

      2. I think it was the folks who took him at his word.

        1. lip readers

    2. As Cheney put it “Reagan taught us that deficits don’t matter.”

      On this, we can agree. However, you failed to refer to Mr. Reagan as Ronnie Raygun. On this we can’t agree.

    3. In the 8th year of Reagan’s presidency, federal revenues were 99% higher than in the first year of Reagan’s, imputing ~9% per annum average growth of federal revenues during the entire Reagan presidency. As always, any increase in deficits during his terms was due to spending growth, not revenue decline or a bad economy. Democrats only speak of deficits when tax cuts are on the table. They are never spoken of when spending increases are envisioned. Witness their outrage over Bush’s 400 billion deficit mid way through his terms, compared with Democrats’ attitudes towards 1.4 trillion deficits “as far as the eye can see”.

  8. And since this (fiscal belt-tightening) won’t happen, do we just have to look forward to TEOTWAKI?

    1. That’s what I inferred from the illustration.

  9. Stealth currency devaluation.

  10. “Yields on 10-year Treasury notes are so low they’re practically giving them all away.”
    And as long as the administration and congress continue to create uncertainty in the market, they will continue to drive a flight to treasury bonds….

  11. The more you spend, the more you save!

  12. The IMF, being the supranational, will buy up all the world’s debt at par and sell it to Martians. Problem solved, YOU’RE WELCOME!

    What are the Martians gonna do, foreclose on the Earth?! *nervous laughter*

  13. I should note, however, that the evidence should be showing up in the cost of public debt service, and so far the evidence has not been found: Yields on 10-year Treasury notes are so low they’re practically giving them all away.

    Yes, they are able to clear their auctions at those rates. The question is whether those auctions are rigged. We know the Fed is buying at these auctions, which is practically an admission that they are rigged. We also know that the number of anonymous buyers has ramped up to unprecedented levels, and there is some suspicion that these are straw buyers, who have an arrangement to sell those bonds back a short time later.

    The entirety of our fiscal policy right now is aimed at keeping the rates on Treasuries low. Because once those rates go up, the cost of debt service goes up, and our deficits and debt will go from being merely horrid to being apocalyptically catastrophic.

    1. I got all excited thinking it was a link to the band D.O.A., but all I got was some shitty cookie monster crap band singing a ‘song’ they call D.O.A.

      In response I present a real band.

      D.O.A., NOMEANSNO, and Neil Young are 3 reasons being a Canadian can’t be all that bad – something to remember when the debt comes due.

      1. Do all Canadians have taste as bad as yours?

      2. Mix hydrogen peroxide and warm water together and insert into your ear with you head leaned down. The bubbly sound you hear is the cleaning process. Once it dies down in about ten minutes, just scrub it out with a paper cloth around your index finger. Do the same for the other ear. Neal Young will never sound the same to you ever again.

  14. A nice expansion of the Kotlikoff piece is here.

    Basic take: Kotlikoff is kind of a Pollyanna. We’re fucked. Major develeraging economic contraction is inevitable. Probably not TEOTWAWKI, but you can see it from there.

  15. “So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act”

    How realistic is this? Over the last 70 years, the most revenue we’ve been able to squeeze out has been 20.9% of GDP with the average being around 18%. Right now we’re sitting at around 14-15%.

    I don’t think there’s any way to pull out 30%…..

    1. There’s not. That’s the point.

  16. But do they point to a future debt of $202 trillion?

    We can easily sustain that.

    1. …until some Republicans get elected. Then it will be impossible, and the only possible solution will be to elect Democrats. Just keep reading my articles for the next few years, and you’ll see.

  17. Obviously we need to cut spending, also, we will need to increase taxes in order to increase government revenue.

    1. The government has enough revenue. More than enough. It’s time to stop binging.

  18. we will need to increase taxes in order to increase government revenue.

    Historically, it has been difficult-to-impossible to extract more than about 20% of GDP in federal taxes. We’re pretty much at that limit now (including payroll taxes). You can raise rates all you want, but the law of diminishing returns applies to taxes, in spades.

    1. …and what’s really scary is the reason it applies. At least when you have a progressive system of taxation, when you pass a certain threshold, people begin to avoid taxes by choosing not to earn a high level of income, or even not to work at all.

      Incentives bat last.

  19. But what if we just tell the baby boomers they already got their SS and medicare money in a different form and they aren’t getting another dime. That’s not breaking a bond, that’s telling them the ugly truth.

    1. They’ll revolt and gum us to death.

    2. But as I said elsewhere, the Progressives already have a solution coming together. If the government runs both Social Security and ObamaCare, then when the bills get too far out of line they can just Retire some retired people.

      Don’t worry, it won’t be rationing because Obama said so. And it won’t be a Death Panel because everybody at Reason said Palin couldn’t possibly be right about absolutely anything.

      Personally, I think once in a while statistics catches up and she does accidentally get something right. But you have to make sure you bitch really loud about her, no matter what she says.

      Because, as the evidence has clearly shown, we’re soooo much better off with Progressives in control of everything that’s going on. Maybe we don’t like the Left very well but we sure do hate the Right a lot more.

      Now then, just go watch The Rise of the Toothless Zombies and eat your pop corn.

  20. a future debt of $202 trillion

    Is it too early to start wondering what number comes after a trillion?

    1. Not if you’re an optimist.

    2. Is it too early to start wondering what number comes after a trillion?

      There is one, but in the government’s case, I think the number should be referred to as a “Zimbabwillion.”

      1. onion comes after trillion. What’s your fucking calculatory problem.

  21. The question is whether those auctions are rigged.

    [insert exclamation of stunned disbelief]

  22. congrats on resurrecting a musical blight.

  23. The IMF the CBO and even you take no account of incentives. They do matter. It wasn’t the Kennedy, Reagan or Bush tax cuts that got us into this deficit mess. US receipts grew after each of these cuts. It’s the spending.

    1. Yes, the problem is that spending increases and tax cuts tend to arrive together.

  24. For some reason, Johnny Cash’s “Ring of Fire” comes to mind…

  25. “While there are many nice things to say about the Reagan Administration, it ended with public debt much larger than it was at the beginning, and it arguably accustomed Washington to an insidious type of government growth that seemed painless only because it was continually rolled over into bigger debt. I’d still say Reagan made the right bet: The U.S. economy was resilient enough to handle a much bigger debt load at the time. That time is over.”

    This is much the most rational and charitable comment about Reagan and the debt recently. But it is wrong as most such comments are.

    LBJ’s War on Poverty cost $6.6 trillion over a thirty year period. That is $220 billion per year on average. At the end of $6.6 trillion and thirty years, there was nothing to show for it but broken poor families, corruption, and wasted money.

    But the increase in the national debt during the Reagan years was almost exactly the amount wasted on LBJ’s War on Poverty during those same years. Reagan should have pulled an Obama and ignored the law mandating the War on Poverty. Then we would have had Reagan’s growth and would have avoided LBJ’s waste, fraud, and corruption.

    And the Democrats would have to find something else to whine about.

  26. Here’s my take on this. The only way to fix this problem is to make massive cuts to government spending, and massively reduce government intervention in the economy to set productive businesses free to produce wealth again. But given how broken the American political system is, neither of these things is going to happen. What will happen is business-as-usual: governments will continue to increase regulation and will attempt to raise taxes, and will continue to borrow money to fund the government. Eventually America will hit the wall fiscally, at which point the government will panic. They’ll stop paying their bills, “temporarily” stop paying social security and medicare, and eventually will resort to the last possible fix: they’ll start printing tons and tons of money, and inflate their way out of this crisis. After all, a billion dollars in debt isn’t so bad if inflation has reduced a billion dollars to the value of a loaf of bread.

  27. There are real solutions to the catastrophic debt we are accumulating: (1) Repeal ObamaCare, (2) Personalize Social Security 100% and get the government out of it, except to vet acceptable investment vehicles for participants, (3) Add free market mechanisms to Medicare. These would be a good start.

  28. I’m a little late to this party, I guess, but if anyone’s interested: http://solutionproblem.wordpre…..ankruptcy/

  29. The U.S. economy was resilient enough to handle a much bigger debt load at the time. That time is over.

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