Cutting Our Way to Balance

By Brett Thomas on November 28, 2011 10:00 AM | No Comments | No TrackBacks
Now, we'll begin to look at where we spend all that money. Below, please find two pie charts, blending a bunch of lower-level categories, and showing how the Federal outlays breakdown. On the left, you'll see the 2011 budget; on the right, the "Alternative" projection from the CBO, which assumes mainly that stuff like the "doc fix" continue to get passed every year, and that the Bush tax cuts never actually expire.

The first thing to note is that, if you hover over the segments, you'll find the percentage of GDP (not the budget) that each expenditure is. Remember that our goal should be for those expenditures to total to 19%, or less - yet in the 2021 budget, it's nearly 26%.

Next, let's think about the process of cutting spending, especially in light of how things went over the summer. After tremendous histrionics, Congress has sort-of agreed (through the failure of the "Super Committee") to cut 0.186% of GDP from the budget, annually.

This year, we'd need to cut a total of 5.1% to hit our target of 19%. These came 50/50 from the category of "Other" and "Defense". The reason they did is because the other categories are essentially uncuttable. I am also skeptical those cuts will actually happen.
However, this year is a bit odd, and it's not worth a lot of effort to try to make our plans based on it. In a decade, the picture looks a lot different, for a number of reasons:
 
  1. Defense drops a lot as we (hopefully) stop fighting in Iraq and Afghanistan (and Libya)
  2. Social Security and Healthcare increases. Frankly, I think OMB's estimate on this is optimistic - they're forced to work in a world where Obamacare's projected savings actually happen. Unfortunately, I don't have a good basis for changing it, so I'm leaving it as-is.
  3. Interest payments on the debt are now a noticeable item (4.4% of GDP). In fact, because of this, we now only really have 14.6% of GDP to spend on things that actually do things. This number may be optimistically small, but we'll leave it there for the moment.
Shooting for the 2021 budget then, let's imagine we take all the stuff everyone in Washington loves to argue about. Funding for the Energy Department; Education; Health and Human Services - heck, let's toss a bunch of Veteran's benefits, and EITC, and Unemployment, and everything out the window. Let's cut the "Discretionary" budget to zero. What's the rest add up to?

18.8% of GDP. That's right, if we cut Defense spending from its current 4.7% of GDP to 2%; and eliminate everything else (and raise taxes 25%, but that's for tomorrow), we just barely get the Federal budget in balance.

In other words, all of the arguing in Washington can't possibly address the problem. And, I reiterate, we're imagining we've had a substantial tax raise, too - if you want to keep taxes where they are, you need to cut this thing even more.

What haven't we looked at? "Social Security and Healthcare". They're 12.4% of GDP in 2021. We're spending 4.4% of GDP on Interest, and that's basically non-negotiable. That means 85% of our sustainable spending that we can do anything about is going into this bucket. It breaks out like this:

As you can see, it's mostly Social Security and Medicare - both programs for the elderly. The way our elections work, it's basically impossible to cut these - there will always be enough voters who will swing on this issue that they'll be able to kick out anyone who tries. There's maybe 1% of GDP you could get in there by repealing Obamacare. Remember, if you're opposed to it - you expect it to cost a lot of money. The CBO, officially, doesn't, so it's scoring the cost in 2021 as being very small. If you think Obamacare is going to be very expensive, then you need to adjust these numbers up, accordingly (which means you need more cuts from elsewhere to bring it into balance).

As long as the parties have split power in Washington - as long one party doesn't have the Presidency; 2/3 of the Senate, and 1/2 + 1 of The House - no progress will be made on significant cuts. That much has been obvious for a while now. What's no so obvious is that, even if one party or the other took over, it is still not going to solve things. The Republicans, for all their talk, are not going to take on Social Security reform at the level of cuts that will be needed - it would be political suicide. The Democrats would prefer to concentrate on tax hikes; but, even if they accepted the need for spending cuts, they would be even less likely than the Republicans to take on the entitlement monster.

What's the bottom line? Making enough cuts to bring the budget into balance is going to be political suicide. As we've seen from other countries, politicians don't commit political suicide. The only way the budget will get significantly cut is when we lose the easy alternative of "just borrow more money."

Tomorrow, we'll discuss what the alternatives are for raising taxes instead of cutting things.  Sneak preview: not good.

Government Spending as a Percent of GDP

By Brett Thomas on November 27, 2011 10:00 AM | No Comments | No TrackBacks
Much of the past seventy years in the United States has seen a debate about "how big" government should be.  Should we have a small government that intrudes little on our lives ("that government is best which governs least"), or should it provide a broad safety net to smooth out the shocks and problems of life?

While I have a philosophical opinion on which of these extremes I'd prefer, it isn't particularly relevant to the situation in which we find ourselves.  Both Democrats and Republicans have done nothing but expand the scope of government for scores of years.  One thing that has not been well-analyzed by either side is the theoretical limit of the size of the government.  While Republicans have tended to chant doom-and-gloom about the growth of government, it has tended to be in vague "someday this is going to cause a problem" terms.

One thing that is becoming very clear is that we are nearing the limit of how big government can get (again, leaving aside any question of how big it should) - and we have probably already exceeded it.  My personal opinion is that a much smaller government than this would mean higher growth and greater net human happiness; but such a thing is so far from the political reality that it seems unlikely to be worth much time analyzing.

What are the limits to government growth?

In the United States, from 1950 - 2010, Federal tax receipts have never exceeded 21% of GDP.  As the economy grows and shrinks, revenues grow and shrink with them.  There seems to be a natural governor on the economy and taxes - as taxes exceed that rate, people become better (and more motivated) at tax evasion; or earn less; or do less; or some combination of those items.  Over the long haul, the average rate has been more like 18% - and it's never exceeded 19% for any length of time.

We therefore can set a theoretical sustained maximum size for income of 19% of GDP.  In 2011, that's about $2.8T.  Again, I'll reiterate - I think it would be better for us to take less money from our citizens.  However, we are talking here about the real world, and the natural constraints on how big the Federal government possibly can get.

We can borrow money to increase what the government can spend.  If our borrowing is in line with GDP growth, in fact, it might be essentially infinitely sustainable.  3% seems like a reasonable guess as to a long-term GDP growth rate.  It might be a little bit on the conservative side (if things go at all well, we'll grow faster), but when we're thinking about borrowing against future earnings it seems reasonable to be conservative about them.

Taking 2011 as an example year, if we take expected GDP of $14.7T, and we figure it'll grow 3% (which I frankly find unlikely in these particular circumstances, but we're building a model, here), we'd expect to add $441B to the economy next year and have a total GDP next year of $15.14.  So, if we borrowed 19% of that this year, we could add another...$80 billion to the Federal expenditures for 2011 in a fairly sustainable fashion.  It's not a lot of money, but it could help smooth things out a bit.

We also can borrow unsustainably.  There is a limit to how much we can do.  How much of a limit?  Frankly, no one knows.  Clearly it's more than 70% of GDP, since we're there and we're still borrowing money just fine.  Japan is currently at nearly 200% - but they have a uniquely stable economy, and, as recent credit ratings downgrades have shown, the markets will not have infinite patience with them.

A reasonable limit for us to imagine for ourselves - given the market's horror at the continuing political strife in Washington - is 120% of GDP.  Maybe the real number is lower; maybe it's higher, but that gives us a good, reasonable target for the point at which interest rates begin to rise.

Putting all this together, for a long-term sustainable US government, the Feds need to spend no more than $2.8T/yr, but they can borrow up to a total of $17.6T total on top of that to spend more.  As of November, 2011, total debt outstanding is $10T, so we have another $7.6T of headroom. Of course, we're not currently taxing at 19% of GDP - we're only going to bring in something like $2.2T, this year in reality.  We're going to spend $3.8T, meaning we'll need to borrow approximately $1.6T, so we'll only have $6T left on our account, this time next year.  We'll (hopefully) increase that by about 3% per year, too, but we're running out of funds to borrow at an alarming rate.  A trivial model would show this running out in a little under four years; the more complex model actually gives us ten, assuming some GDP growth and some short-term cuts in spending as we finish up TARP and pull out of the Middle East.

It is theoretically simple to chart a path through this that isn't terrible for the country.  If we slowly lower expenditures, while slowly raising taxes, we could get the two to cross at $2.8T/year.  That would require a roughly 25% cut in expenditures, coupled with a roughly 25% increase in taxes, all relative to the economy that would be growing at the same time (thus making it easier).

Phased in over a decade - even two, as the initial reductions would buy us more time - this could be done with a relatively small disruption to the economy. However, the lesson we learned from Europe is that the incentives are not there for the politicians to do either of these things.  

In summary - the biggest government the US can sustain indefinitely is about 19% of GDP, which was $2.8T in 2011.  To do that, we'll also need to increase taxes from $2.2T (15% of GDP) to $2.8T (19% of GDP).  If you desire lower taxes, expenditures need to be lowered further, as well.  If you desire more spending, you're going to be long-term stuck, because we haven't yet been able to raise more than 19% of GDP over the long haul.

Finally, we have about $7.6T left on our "credit account" before the bank (probably) starts refusing to lend us more.

Tomorrow, we'll look at ways we could improve this situation by cutting spending - and why, regardless of who is in power, this isn't going to happen.

The End of the Euro

By Brett Thomas on November 26, 2011 10:01 AM | No Comments | No TrackBacks
It has been clear to me for many months (since at least June) that the Euro as we know it is at an end.  Some people are now optimistic that it will "only" result in a northern-Europe Euro zone, but I believe even that is highly unlikely as "bond vigilantes" descend to pick the carcass clean.

While this (relatively) slow-motion train wreck has already been well-described in the media, it's instructive for us to view as a preview to our own future.

A traditional (if imperfect) measure of a country's debt-related economic health is the debt:GDP ratio.  In other words, the total debt outstanding compared to the total value created by that economy in a given year.  It's easy to imagine a similar number for people - your total outstanding (unsecured) debt to your annual income.

The conventional wisdom is that a country whose total debt is less than 100% of its annual GDP is still in basically decent financial shape.  The further you get above that line, the more nervous investors (and ratings agencies) get.  There's no hard-and-fast rule of when there's a problem.  A stable country with a very high ratio (Japan has nearly 200%!) can be considered a fairly safe investment, while a less-sober country (*cough*Italy*cough*) can be in trouble with one as small as 120%.  Also important are rates of change of debt; growth of GDP; signaling by central banks; and many other factors.

Two key principles in these sorts of situations are:

  1. Perception is reality.  As long as people expect you to succeed, you can run very high debts.  The problem is, as soon as they begin to suspect that you'll fail, interest rates rise on the money you have to raise.  Even if you're no longer running up new debts, the old bonds mature and have to be paid off.  If you owe, say, $2.2T in debt, and have a balanced budget (are borrowing no more to keep your spending going), and your average interest rate is 3%, you're spending $66B in interest payments.  However, as those bonds mature, you have to pay them off, probably to the tune of at least hundreds of billions per year.  That money has to come from somewhere, so you have to "roll over" that debt.  If investors become worried that you're in financial difficulty, you'll have to pay higher interest rates on the new bonds.  If that goes to (say) 7%, you're now spending $154B in interest a year - and you're no longer in primary balance on your budget, and need to borrow even more to pay the interest on the new debt. Of course, that new borrowing will also be at a higher rate...
  2. This will be completely fine right up until the moment it isn't.  This stuff doesn't slowly get worse over a decade; it's fine and no one can see a problem, and then all of the sudden (in historical terms) it's a five-alarm fire and it's all over.
It's time to pull the fire alarm.

The Euro Zone is a bunch of mostly-autonomous governments who have decided to have a central bank and a common currency.  However, they each are individually able to borrow money.  Which, a number of them have done with great enthusiasm.  In theory, there were supposed to be limits on how much each country could borrow, but the reality has been that those limits have no real teeth, and they've been routinely flouted.

As Buffet said, "It's only when the tide goes out that you learn who's been swimming naked".  As the global economy faltered, the sharks began to circle.  Europe is now made up of a "core" - France and Germany and some other northern European countries whose debt is no more than about 80% of their GDP; and a "periphery" of southern countries that have ratios of 90%, 100%, 120%.

Six months ago the view was that the "periphery" was made up mostly of small countries, economically - Portugal, Greece, Spain, those sorts of places.  Clearly, if things got too bad, France and Germany would simply step in, pay the overage on their debts, and everything would be basically OK.  Sure, those countries would have to cut their budgets substantially as a term of it, and that would be unpleasant for them, but, it's not a global crisis.

Then, two things happened.  The first is that Germany made it absolutely clear that they weren't interested in being on the hook for an infinite amount of other people's loans.  They were, in other words, not interested in borrowing money to pay off other countries' debts, so those countries could have higher standards of living while Germany had higher taxes.  On the face of it, that seems like a reasonable position, but it is likely to cause Germany long-term harm as the Eurozone falls apart.  The second is that, suddenly (and perhaps in consequence of this), it turned out that one of the countries in real trouble was Italy.  Italy has the 8th largest economy in the world; and the 3rd largest in Europe.  Germany probably couldn't bail Italy out if it wanted to.  As a number of commentators have noted, it's "too big to fail, and too big to bail."

It has been quite amusing to read the European editorialists who pronounce "The European Central Bank [ECB] simply must do..." and then go on to lay out a list of actions that the ECB has already very explicitly said it is not going to take, because it would require German support that doesn't exist.

Now.  It's important to freeze the frame, here - in mid-October, 2011.  This crisis is, in principle, easy to fix.  Italy, Greece, Portugal, Spain, etc. simply need to trim their budgets, and/or raise taxes.  If they can bring their government spending into line, with a bit of a surplus to pay down the debt, they'll be able to send a credible signal to the bond market that they're getting their houses in order, and they're still good investment risks.  Simultaneously, Germany, France and the rest of the (relatively) solvent Eurozone simply have to say, "We are confident that our southern neighbors will put their houses in order.  So confident that we'll happily guarantee any bond they issue."

The incentives to get this right are enormous.  Unfortunately, they are not directed at the correct people:  Politicians. The core countries' electorates have made it clear that, damn the consequences, they are not spending their hard-earned dollars bailing out the profligate periphery.   The peripheries' electorates, meanwhile, have made it clear that, damn the consequences, they are not giving up their early retirements and extensive social safety nets just because those snooty northern Europeans say so.  "Who do those Germans think they are, trying to rule all of Europe from Berlin?" 

Politicians respond to those incentives until it is absolutely impossible not to.  For the periphery, that means when it becomes impossible to borrow new money, and it becomes necessary to finally do something.  The "something", however, will be to leave the Euro and go to their own currency so that they may print it with abandon and buy another couple of years.  That will then be the death knell for the Euro, however, as it will cause a domino run of bank runs as progressively "stronger" economies see mobile capital take flight to safer quarters.

My prediction for Europe?  Some periphery government will be unable to raise new money to roll over debt - which could be very soon indeed, perhaps before the end of the year and probably before the end of January - and will need to leave the Eurozone.  When it does so, it will destroy the Euro, completely - there will be no northern Euro, because the bond vigilantes will eventually set their sights on France.  Perception is reality, and that perceived vulnerability will become an actual one, and the currency union will shatter.

The effects here will be larger than most expect, because their banks are here and our banks are there.  Both of them will suddenly find all their Euro holdings to be of unknown risk (i.e., "junk"), and will be unable to meet reserve requirements.  There will be a bloodbath as these assets are unloaded.

All of those banks will need to park all of those assets, somewhere.

The only logical choice us US Treasuries.
 
In the long run, that is a disaster for us.

Messes, Foreign and Domestic

By Brett Thomas on November 25, 2011 4:20 AM | No Comments | No TrackBacks
When I first began to read about politics, in the late 1980s, I read a number of books that had been written in the late 1970s and early 1980s that were extremely pessimistic.  In a nutshell, they argued that we were running unsustainable deficits, and that eventually the government was going to was going to have to face the music that unsustainable spending was...well, unsustainable.

As my personal economic situation improved along with the country's, in the mid-90s, I began to feel more optimistic. Conservative pundits had been preaching doom for fifteen years, and yet things continued to improve - despite the compelling gut-level logic, as the Dow soared past 10k, the evidence seemed to indicate that things weren't so bad, after all.

Since then, most of my thinking about the deficit has revolved around a few core concepts:

  1. It's not that big a deal because the economy is growing; if we're borrowing about as fast as the economy grows, that's not really a practical issue.
  2. It's not that big a deal because the demographic time bomb that is Social Security isn't going to really explode (i.e., become insolvent) until ~2037.  In the year 2000, that was nearly 40 years off - and we'd had previous deadlines we'd managed to move by tweaking things.  In 1960, who could've begun to predict the economy in 2000?  Clearly there's no sense worrying too much about something so far away.  However, given that 2035 is when I would personally be eligible for Social Security, I did resolve not to base my retirement plans on its availability.
A few things have happened to change this thinking:

  1. The economy stopped growing.  For the first time in fifty years, from 2007 - 2010, GDP growth has been essentially flat, and it's looking like 2011 isn't going to be much of an improvement.  This graph is instructive.
  2. The slowed economy has caused a lot more people to enter forced retirement early.  Additionally the payroll tax holiday of 2010 reduced how much was being paid in.  That has significantly pulled in when Social Security begins to draw from the treasury instead of paying into it - from ~2037 ten years ago to...gulp...now.
  3. The Federal government is spending a lot more money now than they were ten years ago.  In 2000, we spent $1.8T, from an economy making $10T (GDP).  In 2010, we spent $3.5T from an economy making $14.7T.  We went from spending 18% of our GDP to spending 24%.
We are not yet completely doomed.  Right now we're adding about 1/15th of GDP to our standing debt every year.  There is some reason to be mildly optimistic this will drop a bit in the next few years (as we wind up wars and neglect to deploy new TARPs), but our long-term commitments have only gone up in the past few years.

In the midst of this, though, there is a crisis in Europe.  Europe will not survive this crisis in anywhere near its current form - and what happens there has both lessons for us, and direct effects upon us.

I intend this to be the first of a many-part series on what's going on in the world, and what the next decade will look like. The next piece will give my views on the short-term future for Europe, and perhaps something of what that will mean for us.

First Circuit Reiterates Recording Police Isn't A Crime

By Brett Thomas on August 30, 2011 9:07 AM | No Comments | No TrackBacks

As mobile phones with video recording capabilities have proliferated, we've had a lot of interactions in the past few years between citizens with video recorders, and officers who aren't happy about being recorded.  These cases tend to involve officers arresting people for violating their state's "wiretapping" laws, which generally prevent recording another without his or her knowledge.  Most of these laws also have explicit exclusions for recordings made in a public place; the few states that do not have tended to have public officials who believe they are entitled to crush people's First and Fourth Amendment rights simply so that no record of their official conduct in public may be made.

Back in 2007, Simon Glik was walking past Boston Common and witnessed three officers arresting a man.  Fearing the arrest was unnecessarily violent, Mr. Glik began recording it on his mobile phone.  After that arrest was complete and the suspect was detained, he was approached and told by an officer to stop taking pictures.  He informed the officer that he was actually taking video, at which point he was asked whether his video recording included sound.  When he answered in the affirmative, he was arrested, and subsequently charged with violating the state's wiretapping laws; disturbing the peace (!); and aiding in the escape of a prisoner (!!).  All three charges were subsequently dropped.  When Mr. Glik requested a investigation from the Suffolk County Police Department's Internal Affairs division, he was ignored, so he filed a 42 U.S.C. ยง 1983 civil rights violation case against the officers in question.

The officers, of course, claimed qualified immunity, under which an officer acting in good faith is generally immune from prosecution.  The legal standard for this is that if a "reasonable" officer would have recognized that his conduct violated someone's Constitutional rights, immunity is lost and the case may proceed.  The District court indeed concluded that a reasonable officer should've recognized that arresting Mr. Glik for recording them was a violation of his First Amendment rights, and that, therefor, they had no qualified immunity.  The officers appealed, and, today, a three-judge panel affirmed that, yes, they should've known they were trampling Mr. Gilk's constitutional rights, and that they could consequently be sued.

This is a tremendous victory not just for our rights - we need more decisions like this to remind public officials who their real bosses are.  It's also not just a victory for snark (Boston Common is "the oldest city park in the United  States and the apotheosis of a public forum").  It hammers home three really important points.

1.  You have a First Amendment right to record public officials in public while performing their duties.

The filming of government officials engaged in their duties in a public place, including police officers performing their responsibilities, fits comfortably within [First Amendment protections].

2.  That right does not just extend to some sort of "professional" press corps - we all have it.

It is of no significance that the present case...involves a private individual, and not a reporter, gathering information about public officials. The First Amendment right to gather news is, as the Court has often noted, not one that inures solely to the benefit of the news media; rather, the public's right of access to information is coextensive with that of the press.

3.  Officers who are arresting people today for "wiretapping" violations while exercising their First Amendment rights are on notice that they may be held personally liable for these illegal arrests.

As activists like Photography Is Not A Crime have shown, the number of officers who seem to feel they have an ability to stop us recording them is large.  Perhaps recognizing that they are personally on the hook for these rights violations will encourage them to tolerate citizens peacefully recording them, instead of arresting law-abiding citizens for the crime of not showing proper deference.

Back, sort of.

By Brett Thomas on August 29, 2011 2:41 PM | No Comments | No TrackBacks
My old server (huxley, long may he rest in peace) finally gave up the ghost.  I'd been expecting this for a long time, and had (I thought) everything I at all cared about it, off of it.

It turned out I missed something, though - the blog.  So, it's now hosted back here but the archives are currently a mess (and, obviously, the templates and links and what-not here are gone).

Still Human

By Brett Thomas on March 15, 2010 1:49 AM | No Comments | No TrackBacks
Documntarian Rob Spence wants a camera where his mother put an eye. Aimee Mullins' parents weren't able to provide her legs - or, in any event, not all of them - and, as a result, she has more square inches of leg than just about anyone else. Alex Tabarrok - who, as far as I know, still has both the eyes and legs he came with - thinks that Aimee's talk at TED is "notable in so clearly marking the point at which post-humanity has begun".

Unless we place the "post-human" point so that its mile-marker is already distant in our rear view, it is one we have not yet passed. Many of the legs Aimee proudly displays (such as the beautiful hand-carved ash set) would certainly have been possible in an earlier time. Perhaps the society that would allow her to display them is a bit newer. The true "post-human" age, however, will not arise until people begin maiming themselves on purpose to have faster legs, or cameras in their eyes - and until such actions are seen as normal.

Mr. Spence's eye will have to not just record his vision, but send it to his brain, and more, before many will choose to replace their peepers. It seems likely, that some - filmmakers, like he, perhaps - will desire this sort of change before the rest of us. Even before the technology improves, that much. Speculation on this topic hit the mainstream when Oscar Pistorius was allowed to tryout for the Olympics in 2008. Should prosthetic-legged sprinters be allowed to compete with naturally-shanked ones, the former will begin to win, and a non-zero number of the victory-at-any-cost latter will become interested in trading up.

Medical ethics - still saddled with "First, do no harm" - is unlikely to adapt to these desires, quickly. The first brave pioneers of these technologies may actually have to injure themselves in order to get surgeons to repair (and improve) them. Putting one's eye out is an unpleasant business, though possible enough to do "accidentally" - and without further accident. Self-double amputation will be more ill-starred.

These ethical concerns will obviously not stop the truly motivated (or insane) from improving their bodies, as technology eventually begins to beat evolution in feature-set. Some people already feel that truly nothing would be better than the limbs they have, now. Applying Moore's Law to the human body (and mind) will be a long-term good. The ethical tangle between here and there will be nearly as impressive as the technology we'll create. More impressive still is how quickly we'll be caught in it.
Archives