Spending

D.C. Running Out of Other People's Money If It Doesn't Change Its Ways

Advocates of unlimited spending like to portray their proposals as a boon to the American people. But they are helping some by hurting others.

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Dave Brat, the Tea Party's Cantor-killing missile from Virginia's seventh Congressional District, has been hammering away at two issues since winning election: immigration and federal spending. He's dead wrong about the first one. He's dead right about the second.

The other day, the congressman spoke to a group of business leaders in his district. If Congress does not do something about entitlement spending soon, he said, the country will be facing $127 trillion in unfunded liabilities by 2027. That's the gap between what D.C. has committed to spend and the amount of revenue it will collect through current tax policy.

By that point, just a few programs — Medicare, Medicaid, Social Security and interest on the national debt — will consume every cent Uncle Sam takes in. "How much money will there be at a federal level for education, military or transportation funding?" he asked. "Zero."

Brat's assertions have been vetted by Politifact, which found no major grounds for disagreement. It's possible that D.C. could push back the point at which entitlements and interest account for every single tax dollar to the 2040s. But that assumes Congress will stick with current policies, such as sequestration; allow tax cuts to expire when they are scheduled to; enact no new spending plans and expand no current ones — i.e., that it will do things for which it has no stomach, and which it has no record of having done in the past.

***

Just look at the "doc fix," which Congress killed off earlier this year. A couple of decades ago, Congress passed a balanced-budget act that imposed something called the Sustainable Growth Rate on Medicare. It was supposed to hold Medicare spending in line with GDP growth. That meant cutting payments to doctors. Naturally, doctors objected, so Congress started passing an annual "doc fix" to get around the spending limit.

This merely increased the size of the cut to physician reimbursement the following year, creating even more strenuous opposition from doctors. So finally Congress threw in the towel and gave up on the cuts altogether. President Obama signed the measure in a Rose Garden ceremony, hailing it as a great "bipartisan achievement."

The death of the doc fix is a case study in federal spending dysfunction. If Washington cannot even agree to abide by budget-cutting laws it already has passed, there is little hope it will stick with even tougher budget cuts in the years ahead. Hence the more realistic scenario from the Congressional Budget Office projects a future in which federal deficits of more than $1 trillion become the norm.

The national debt will grow from three-fourths of GDP by 2040 to more than 100 percent. As federal government debt piles up, it will crowd out private-sector investment, slow down economic growth (if there is any), and reduce per-capita GDP by about $2,000.

***

Mind you, this is the realistic budget scenario. But there is another, even grimmer scenario that might be just as likely. Call it the Tooth-Fairy Scenario. It could occur if Democrats take back the White House and enough of Congress to get their way.

Social Security is on track to run out of money in a couple of decades, yet lately Democrats have been not only resisting efforts to fix the problem but talking about expansion. Now they are advocating another entitlement: free or nearly free college for everyone. The sticker price for Hillary Clinton's proposal — modest compared with that of Bernie Sanders' — is $350 billion over 10 years, although the final bill could be much higher.

Clinton also wants the government to provide universal pre-kindergarten. Her economic proposals would cost "hundreds of billions of dollars," in the words of The New York Times. And she is a piker compared with Sanders, who wants to jack up spending over the next five years to $1 trillion — on transportation alone. Maryland Sen. Barbara Mikulski, another Democrat, has co-signed that idea.

Advocates of unlimited spending like to portray their proposals as a boon to the American people. But Brat points out that they are helping some by hurting others — namely, the future Americans who will be stuck trying to pay off ruinous levels of debt. For a picture of what that might resemble, have a look at modern-day Greece.

When most of the political class is promising more free stuff for everyone, a fiscal realist like Brat can sound like a figure from ancient Greece: Cassandra, the prophetess. We think of her today as a figure of doom and gloom, and it was her curse that no one listened to her. She and Brat might have that in common. So it is worth remembering that despite others' disbelief, Cassandra's prophecies came true.

This article originally appeared in the Richmond Times-Dispatch.

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  1. “My story is to solve these systematic problems now so the kids actually have some of these systems. I’m not proposing we get rid of anything.”

    The political atmosphere, yeah, yeah, yeah. Means test for now and slowly work towards getting rid of these programs. Or just give in to the Democrats. Expand SS, Medicare? Sure. $15 minimum wage. I wouldn’t, but have at it. Anything other than this slow motion train wreck.

    1. The problem though is even if we give them all of that, they will never recognize that it was those programs that killed the country. They will always find someone to blame.

      1. New Rule: Everytime you put your hand in the public cookie jar, you must put the other hand in the woodchipper.

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  2. Having done significant remodels on structurally flawed homes I would suggest that it is more efficient, economical and you get a better final product by demolishing the original structure and starting over. And it is cool to watch the building mulchers at work.

  3. Make your mind up. If SS is solvent until 2033, then debt is already over 100%. If debt is only 75% today, then SS has been bankrupt since 2010. And remind me what those immigrants keep voting for…

    Yeah, yeah. TWO TOTALLY DIFFERENT THINGS. Just like gas and fire are two totally different things.

    1. Debt is already over 100% of GDP. The 70% figure excludes debt the government owes to itself, which for some magical reason doesn’t count.

      1. Money you owe yourself isn’t debt. If you have $100 in one bank account, nothing in another bank account, and no debt, you have a total of $100 in net worth. If you then transfer $100 out of the first bank account and into the second, nothing has changed in your financial position. Only your accounts have changed, but since all the accounts belong to you your total position is the same. If you decide to call the transfer a “loan” from the first account to the second, all you’ve done is change the terminology from “transfer” to “loan.” The net financial position is still the same. It’s the same when one Federal governmental unit holds debt issued by another. The effective net Federal debt is unaffected. Although the amount of treasury securities outstanding may have gone up (just as your “debt” went up if you decided to call the bank transfer a loan) the effective net debt – money the government has to raise to pay off debt hasn’t gone up.

  4. With the exception of some conservative Republicans, control of federal spending is not an issue. Most politicians have given up. They simply ignore the problem because there is no practical solution. It is ridiculous to contemplate, but we are all lemmings marching to the cliff.

    1. Sadly, I think you are 100% correct. It’s utterly shocking that no one is talking about it.

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  6. “Advocates of unlimited spending like to portray their proposals as a boon to the American people”

    Yes, yes, they do.

  7. I’m sick of this argument. The US government can’t “run out” of money; it creates US dollars which, rather conveniently, are universally accepted by the people who provide services to the US government. The only way the US government can default on any obligation is if it chooses to do so, NOT because it doesn’t have the money to do so. Social Security won’t “run out” of money in two decades because Social Security is the US government.

    Now, creating too many US dollars may be a problem. But it is apparently much easier to compare the US government’s budget to a budget of an entity that can’t create its own money (and attack it that way) than actually try to educate people on sovereign debt, inflation, how the Federal Reserve works, etc.

    1. One step at a time. Humans aren’t calibrated to relearn everything they need to know about politics all at once.

    2. Is there really that much of a difference between the “Mugabe Solution” and running out of money?

    3. Running till you have zero money, is the same as running your money till its worth zero.

    4. Hey moron let me explain it to you and I’ll use small words so you might be able to follow along.

      Yes, in theory the government could just fire up the printing presses to meet all of it’s obligations in nominal terms. The problem is by doing this you are increasing the supply of dollars available in the market without increasing the total of value of goods and services being supplied in the marketplace meaning that each dollar buys less value.

      So if the government owes you $100 but only has $50 and subsequently prints the other $50 causing the purchasing power of that $100 to fall to $80 then yes they have paid you the value of their debt however it does you little good because you still only get $80 in value out of it.

      This causes 2 problems, first with individuals, they will no longer have enough money to make ends meet. Sure they are getting the full value of their benefits/salaries but those will no longer be sufficient to pay their bills and lead to demands that their benefits be raised to $125 to compensate for the loss of purchasing power. Second with companies and other nations well there is nothing written stone saying that they will always accept dollars and when you devalue those dollars enough they will begin to rapidly abandon them and demand payment in more stable currency.

      Trying to print our way out of the fiscal mess we are in might buy us 2 years at most and then leave us toting around wheel barrels just to have enough cash for a loaf of bread

    5. Technically true, but it’s a distinction without a difference. So yes, it would be nice if everyone were up-to-speed on the nuances and terminology, but most people would walk away before mucking through that. Putting in terms they understand helps educate them on the real issue – we’re spending too much.

    6. Well done, Mr. bassjoe. Have you been reading some of Cullen Roche’s work, or perhaps Warren Mosler? As I pointed out yesterday with a comment, it seems that Mr. Hinkle does not understand how a fiat currency system works.

      I challenge him (or anybody else) to explain why the federal debt has to “crowd out” private sector investment. Seems to me that the only way that could happen is that if the federal government started buying a lot more goods and services from the private sector– and kept outbidding the rest of us for those goods and services.

      The risk, as I think you know, is inflation — not solvency. I don’t ignore that risk — but have yet to see any compelling modeling showing how the federal debt will likely cause hyperinflation. I’m still looking — but note that Japan hasn’t provided any clues yet — and they’re carrying a lot more federal debt (relatively) than the USA.

      Because our economy continues to operate well below its productive capacity, I am not concerned about harmful inflation.

      1. I read the article’s title, and I knew that blonderealist would be along shortly to explain to everyone how the risk isn’t solvency, but inflation.

        Because, as far as I know, that’s all blonderealist has to say about anything, ever.

        1. Thank you. I am in a rut and appreciate you pointing that out. I tend to agree with much of what the writer/journalist folks at Reason have to say, so it’s true that I don’t chime in very often about other topics.

          Having said that, it would be nice if the folks at Reason would do some homework and learn how our modern monetary system works. I’m almost embarrassed for them when they say things like “we’re going to end up like Greece”. All I’m asking for is an accurate description of the potential problems – I’m not suggesting we won’t run in to problems.

          1. So, how would you suggest they describe potential problems?

            As far as I know, the Fed’s mandate is:
            maximum employment, stable prices, and moderate long-term interest rates

            I don’t see the mandate for:
            “print money for the government to borrow and spend because they need it”

            And, at the point you switch over to that, it’s unclear that everything just turns out peachy keen for everyone.

            So, what do you think the accurate way to describe this situation?

            Because saying “hey, we have a fiat currency, so we’ll never ‘run out of money'” isn’t really informative.

            If the idea is that they couch the entire article in the details of fiat currency so that their articles are technically accurate, yet completely distracting by fed policy details, then I think I understand why they just use the short form (i.e., “run out of money”) then go into all of that. Do you have a better suggestion?

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  9. Did you all forget that leading up to the 2010 mid term elections reducing federal spending and debt was ALL the GOP and “tea party” candidates were talking about. Well, we’ve seen what electing those assholes has accomplished. Tons of reduced spending and a huge reduction in the debt! yay! We should vote in more people who claim to be fiscally conservative.

    1. We may have elected a sizable number of TEA Party types to the Congress, but until the leadership changes, the policies won’t.

  10. Boy, if only someone like the Comptroller General of the US, ten years ago, started to chant about the issue of unfunded obligations, to a point seven years ago criss-crossing the country to plead with the US citizenry to wake the hell up, followed around by a bi-partisan group of people to try and help get the message out to their particular sheep.

    Nobody gave a shit about Comptroller General Walker had to say a decade or so ago, and I doubt they give a shit now. It’s the same overall apathy the ACA crafting assholes depended on, and even chortled about.

    It’s not going to end pretty. I’ve learned to live with it.

    For now.

  11. Does Hinkle understand how our fiat currency system works? It seems that the answer is likely to be “no”. This is not to say that our system does not face risks, but when he talks about the federal government running out of money, he is using the wrong operational construct. Solvency is not the risk — inflation is the risk. Hinkle would make more sense if he wrote about how our living standards will decrease due to harmful inflation once the federal government (if this ever happens) has to print so much money that harmful inflation is unavoidable.

    1. Tomato/tomahto. The Federal government might be able to pay its bills, but all that will be left is a smoking hole where the world economy used to be. Either way we’ll have to eat our neighbors to survive.

      1. Completely unrelated: Does anyone here know a contractor that can convert a walk-in closet into a walk-in Freezer? I’m on a budget.

  12. — He’s dead wrong about the first one. He’s dead right about the second.

    Actually, he’s dead right about both of them – with the caveat that we should not pay to deport the criminals in our country illegally. We should give them a deadline, and once that passes, put a bounty on them – dead or alive.

  13. Perhaps the beginning of a solution to the problem that Cong. Brat attacks that you agree with, is to finally deal substantially with the problem he attacks that you disagree with?
    After all, it hasn’t gotten any better by ignoring it since 1986 – which only exacerbated the problem.

  14. Universal pre kindergarden, why do the taxpayers have to fund the rich for their children in kindergarden or universal pre kindergarden?? The rich can pay for maids and nannies and not use the services which are supposed to be for the hardworking taxpayers. This is not for the poor or the middle class and it is not a babysitting service for the salon goers or shoppers or going to the hair salon, maybe a pedicure or manicure while their kids are being taken care of with taxpayer dollars. It won’t cost Hillary a dime, it will cost the taxpayers millions and billions. Funny how they don’t mind at all about giving our hardearned taxpayer dollars away to who they like. Take from the poor and give to the rich unlike Robin Hood who took from the rich and gave to the poor.

  15. Not a very good way to run things:

    Unfunded liabilities: Definition

    The amount, at any given time, by which future payment obligations exceed the present value of funds available to pay them. For example, a pension plan’s payment obligations, including all income, death and termination benefits owed, are compared to the plan’s present investment experience, and if the total plan obligations exceed the projected plan assets at any point in time, the plan has an unfunded liability.

    Use unfunded liability in a sentence

    “The unfunded liability naturally carried an inherent risk however we were sure the demand would increase after marketing our project. ”

    Unfunded

    Describing any liability or other expense that does not have savings or investments set aside to pay it. That is, the party responsible for paying an unfunded liability pays for it out of current income or by borrowing. The risk of an unfunded liability is that a payee may not receive that which he/she is entitled to if the payer goes through a difficult financial period. It also increases the payer’s current liabilities.

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  18. Simply put, no matter what the US government does they are financially ruined. We have all sorts of exponential growth technologies coming, and various disruptive ones that will cause huge amounts of unemployment and deflationary pressure.

    1) robotics will cause half the people currently employed to be out of work in 20 years.
    2) solar power will cause huge amounts of deflationary pressure as it and energy storage reduce the cost of manufactured goods by ~50 percent. About half the cost of manufactured goods is energy costs.
    3) Combined reduced energy costs and robotics will cause a huge decrease in the cost of living and the cost of manufactured goods, and the money government has coming in.
    4) 3D house printing will cause a huge 80% reduction in the cost of housing, over a 5-10 year period. This in turn will cause existing houses to become stranded assets, and the total failure of the mortgage banking industry.
    5) etc, etc,etc

    Basically, most governments running a deficit are doomed due to the technology being created today.

  19. Our society has learned to live in credit and now we have the results of such attitude to money. People have no idea how to cover their own debts that are just increasing with student loans and mortgages. And the whole country has no support of gold reserve, so all debts are making the situation only worse. Many people are also caught in a trap of financial service like the one presented here http://northnloans.ca/ that does not solve any financial problems making the debt grow. So the budget should be created according to the high national debt and with a plan for repaying it.

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