May 20, 2012

Retirement Plans? Private Investment is still Smarter than Social Security

February 22, 2012 By Leave a Comment

Well, maybe ‘smarter’ isn’t the best word (see headline). Perhaps ‘a better investment’ would be more accurate.

[...]private capital investment remains remarkably safe over the long term. Despite recent declines in the stock market, a worker who had invested privately over the past 40 years would have still earned an average yearly return of 6.85 percent investing in the S&P 500, 3.46 percent from corporate bonds, and 2.44 percent from government bonds.

In contrast, Social Security,

  • Once the safety net for the poor, is the safety net for most retired Americans. Nine out of ten people age 65 and older receive Social Security benefits.
  • As of 2009, 55,905,731 Americans–rich or poor–received Social Security benefits. In 2011, it cost us $727 billion.
  • Once funded by 159 workers per beneficiary, there are so many Social Security beneficiaries that there are only 1.75 workers in the labor force  per Social Security recipient to fund it. That’s down from 2.9 in 2010 and the most dramatic drop since 1955.
  • Today, it is completely unfunded. The Social Security trust fund has been raided so many times by politicians, that there’s no longer any money in it…just IOUs.

So, which system do you want to be covered by when you retire? One that has paid out an annual return of 6.85 percent or one that’s completely bankrupt and funded from current tax dollars? Apparently, America is split on that question:

  • 50% of the workforce has no private pension coverage.
  • 31% of the workforce has no savings set aside specifically for retirement.

I have only one question if you are part of that 50% or 31%: are you crazy?

APROPOS: See also my review of Congressman Jason Chaffetz‘s notable effort to reform, fix, and revitalize Social Security to make it solvent again here.

Related articles
Filed Under: Entitlement Reform Tagged With: , , , , , , ,

Are we in the midst of the rise of China and the decline of America? [graphs]

January 5, 2012 By 1 Comment

These may not be the best of times, but they are not yet the worst of times, either.

That may still be yet to come.

From “Grand Strategies” by Charles Hill:

The first principle of grand strategy is that one must understand what is going on in the world. The question “What’s happening?” is more than a cheerful greeting. Policies and decisions will from such an assessment, and confrontations may emerge from differing views about what is taking place and why. Yet those who are living through great historical events can rarely even glimpse the significance of what is going on all around them.

And what, you ask, are the “great historical events” that we are living through? Indeed, isn’t that the point of asking “what’s happening?”

That’s a great question. I’m not sure the answer. But I did see some graphs the other day that have started me to wonder.  and

For example:

We're facing a dearth of investment at the very time when our country needs it.

Quoted in The Atlantic, Michael Mandel, chief economist of the Progressive Policy Institute, says that

This recession is marked by a massive investment drought in the U.S., which will have long-term negative consequences. The proof: In the latest quarter, net domestic investment was only 3.3% of net national product, compared to 8.0%  in 2007. There’s been a rebound in investment since 2009, but it’s been very  mild–far less than the country needs.

Ouch.

Here’s another disturbing graph:

 

The accompanying quote is from Treasury Assistant Secretary for Economic Policy Dr. Jan Eberly:

The economy suffered a severe shock during the recession, with the result that economic activity, represented by the blue line, contracted sharply. Since then, GDP has recovered at a steady pace and now stands above its pre-recession level. However, GDP growth has merely kept pace with its trend (or potential) rate, the red line, which is a function of population growth, changes in labor supply, and productivity growth.  As a result, the gap between what our economy is producing and what it could produce if it were operating at the level implied by the trend has not closed much. The green bars show this unused capacity to have equaled 7.4% – or more than $1 trillion – of potential output in Q3 2011. This unused capacity represents workers who cannot find jobs, idle machinery, and foregone opportunities for growth; in this challenging economy, this chart underscores why we must continue to focus attention on investments in the economic recovery and long-run growth.

In other words, our county is not operating at capacity, not by a large margin.

But wait! There’s more! Our national debt is beyond levels that have crippled other countries.  Check this:

Explains Emily Goff, Research Assistant, Thomas A. Roe Institute for Economic Policy Studies, Heritage Foundation, that federal spending it killing us slowly by comparing our projected debt to other countries’ current debt.

Greece, Italy, Spain and other countries are suffering from a financial and economic crisis – fueled by unmanageable debt and monetary policy failure – that will surely affect the U.S. economy. As this graph shows, debt held by the public in the U.S. totals about 70 percent of the economy. For the U.S. to avoid going down the same path as Europe, Washington must curb federal spending.

The scary part about the spending is that it has nothing to do with the usual boogeyman of pork projects and earmarks. It’s nearly a problem of entitlements, a class of federal spending that is locked in year after year.

It’s benefits that we’ve awarded ourselves without a real way to pay for them. Says Patrick Louis Knudsen, Grover M. Hermann Senior Fellow in Federal Budgetary Affairs, Thomas A. Roe Institute for Economic Policy Studies, as he explains:

Since the adoption of President Johnson’s Great Society programs, spending on entitlement programs has grown more than five times faster than annually appropriated discretionary spending. The entitlements run on autopilot, with rare congressional oversight. This unsustainable rate of spending threatens to overwhelm the budget and smother the economy.

That’s just stupid. No company or family adds to their costs without checking afford to pay. If they don’t, it’s called bankruptcy. (One Congressional exception to this “rare congressional oversight, if I might add, is Congressman Chaffetz‘ plan to reform social security. Check it out here).

But the CBO said that Obamacare would be affordable…right? Wrong-o.

As this graph shows, under average historical levels of revenue, Medicare, Medicaid, and Social Security will consume all tax revenues by 2049. We must reform these entitlement programs now to make them fiscally sustainable and to ensure that seniors are protected from poverty, without burying younger generations under insurmountable levels of debt.” –

That’s Romina Boccia, Research Coordinator, Thomas A. Roe Institute for Economic Policy Studies.

Check out a plethora of other graphs at The Atlantic. They include looks at taxes, oil and gas subsidies, green investment, income disparity, and so on, including, very interestingly, that the wealthy pay almost all federal tax revenues.

The post  at The Atlantic “charts” out a lot of problems that all seem to return to complex issues our country has been debating for well over a century (or at least since Theodore Roosevelt took on Wall Street trusts in the early 1900s, if not earlier), namely the distribution of wealth and property and what is fair.

Without a doubt, the republic was founded to protect the rights of life, liberty, and property and more than ever individuals are questioning whose property is being protected. It’s one thing when every man has an equal opportunity; it’s another thing altogether when the game is rigged–through crony capitalism, sweet-heart deals, and corruption–against those who have less.

If these days and years will be seen as great, it will be because we will decide in coming months and years what course we will take, pass policies that reverse the trends and return America to its competitive edge and full solvency as the best investment in the world, or whether we will lapse into decline. Will we figure out a way to care for the poor and disadvantaged, to keep our promises to older generations, but refrain from pouring an unbearable burden on our children and grandchildren?

Or, perhaps better said: will we return America to a beacon on a hill, the leader of the free world?

I’ve saved one graph for last:

Notes: This index is weighted average of the share of a country in world GDP, trade, and in world net exports of capital. The index ranges from 0 to 100 percent (for creditors) but could assume negative values for net debtors. The weights for this figure are 0.6 for GDP (split equally between GDP measured at market and purchasing power parity exchange rates, respectively; 0.35 for trade; and 0.05 for net exports of capital.

If we are to see “morning in America” again, we have little time left to wait. Steven R. Weisman, editorial director, Peterson Institute for International Economics, say that

This chart from Arvind Subramanian’s new book, ‘Eclipse: Living in the Shadow of China’s Economic Dominance,’ is interesting in three respects. First, it tracks broadly the economic dominance of the previous two superpowers, the United States and Great Britain. Second, it suggests today that China has come close to matching the United States in terms of dominance.  Third, it suggests that under conservative assumption about economic growth for China and the United States, by 2030 the world may well see a G-1, with China as the economic hegemon.”

China eclipsing America?

Whether we are standing at the apex of American prosperity and leadership or whether we are at merely a point on a growth trajectory is up to us and who we select as our elected leaders in coming months. If these years are not seen by future generations as significant, then it is only because future prosperity and growth will eclipse what we saw in the past.

And that’s an eclipse I would rather see.

[The Atlantic]

Related articles
Filed Under: Entitlement Reform, Foreign Policy Tagged With: , , , , , , , , ,

Could Congressman Chaffetz save Social Security? [Charts]

December 16, 2011 By 3 Comments

Would you believe that Social Security is now running in a deficit? Shocker, right?

According to the 2011 Annual Report  (the “Report”) to Social Security and Medicare Boards of Trustees, “Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983.” Or, in other words, Social Security sent out to retirees and disabled recipients more than working America contributed into the trust fund.

Ostensibly, the Report attributes this to a slow economy and excess contributions from the previous year. After a slight resurgence until 2014, that deficit is set to grow as more Social Security beneficiaries draw on the Social Security trust fund. Then, in 2036, when I’m hitting my sixties, the trust fund reserves will be “exhausted.”

Meanwhile, the amount of my taxable wages that will go to Social Security is steadily rising, from 11.5% in 2007 to about 17% in 2035. In other words, not only is the trust fund reserves disappearing, but I’ll have less income to live on over that time.

After 2035, “tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.” By the way, the trust fund isn’t even real. It’s numbers on a paper. It’s been emptied out by Washington for other projects, and we’re living on borrowed money, anyway.

Thankfully, I don’t plan on living until 2085…but my daughters will, and they’ll be dealing with that load of junk then.

Unless someone fixes it. Fat chance at that, right? It’s the proverbial “third rail,” in Washington parlance.

I’d probably do better to make a small fortune than rely on Social Security for when I retire.

Enter Rep. Chaffetz’s ‘‘Social Security Reform Act of 2011’’

In November, Utah’s Rep. Jason Chaffetz proposed a bill to reform Social Security to return the program to solvency.  Among others, the reform would accomplish some substantive results:

  • Slow the growth in Social Security spending.
  • Achieve annual balance 2051 and actuarial balance over 75 years
  • A larger check for most retirees than they would receive without any reform
  • No tax increases
  • —No private accounts

How will the plan work?

First, it’ll raise the retirement age. The retirement age will rise a rate of 2 months per year until it reaches 69 in 2041 (if you were born in 1972)

    • After 2041, the retirement age is indexed to changes in life expectancy, which is expected to be one month increase every two years.
    • Early retirement age will be unchanged and it will maintain delayed retirement credit (8%/year, maximum 4 years)
    • Since so many people retire early (two-thirds), there will be a reduction in benefits during early retirement.

Second, change the way cost of living is calculated. Rather than a CPI-W, use a chained CPI.

Wait. Wha–? “Chained CPI.” According to Robert Greensteinof the Center on Budget and Policy, “chained CPI” is a measure of what it costs to live in America:

The regular CPI measures the costs each month of a market basket of items that average Americans may purchase each month and so it tells us how much prices are rising, what the inflation rate is. The chained CPI is identical, really, to the regular CPI in all respects except one. It includes an adjustment so that if, for example, beef prices rise much faster than chicken prices, and consumers, as a result, buy less beef and more chicken, it picks up the switching from the beef to the chicken, which makes their total costs for the month rise a little less quickly than if you assumed they continued to buy the same amount of beef and the same amount of chicken as before.

Get it? A more accurate measure of how much it costs to live in America.

Back to the plan:

Third, change the way that insurance for beneficiaries is calculated by increasing the index for people who make above the 50% during their working career.

Fourth, gradually increase the number of years used to calculate the average monthly earnings from thirty-five to forty years.

Fifth, tie special minimum benefits to wages instead of CPI.

Sixth, increase benefits for 85 and older by 5%.

Last, and I like this part a lot, use a means test  to reduce the benefit for people who made $360,000 in the previous year. In other words, if you don’t need social security, why are you getting it?

A little more complicated than some of the simplistic rhetoric you often hear, perhaps, but the devil is in the details and the value is in the results…which are what? How about a path towards Social Security solvency?

Check out this chart of projected changes in Social Security under the current law without changes and under the Chaffetz proposal:

Those are percentages. But how much money does this amount to? Look at this chart below on how much the deficit between revenues and expenditures will be over just the next nine years:

Under the Chaffetz proposal, each year (every ten years on this chart) will see a gradual increase in the percentage of taxable payroll as a percentage of the federal budget. Assuming that Congressional

lawmakers don’t raid that money or increase the benefits without corresponding increases in revenues, this plan would put Social Security on a path towards the black.

Lauding Rep. Chaffetz for making a substantive effort at reforming Social Security, the Provo Daily Herald supports his effort and his plan. Comparing him to Rep. Paul Ryan, who earlier this year was pilloried by Democrats for his budget plan, the Herald observed that the plan could work.

In other words, Chaffetz’s plan would keep the system from going broke. The letter isn’t meant to be an endorsement of the idea; and we all know how slippery Washington numbers can be. But this proposal at least seems to be grounded in reality.

Politically — which is just as important — the scheme seems viable. The idea is not to slash benefits for everyone, but to slowly reduce

increases. With savings compounding, that would enable the system to regain financial stability with few if any retirees noticing the changes.

More important than the Daily Herald, though, was the endorsement by the Social Security Administration itself. In a November 9, 2011 letter to the Congressman, the SSA said that

“We estimate that enactment of the basic provisions in this proposal would maintain solvency of the OASDI [Old Age, Survivors, and Disability Insurance] program throughout the long-range (75-year) projection period and would fulfill the requirements for sustainable solvency[.]“

Emphasis mine.

Even the Salt Lake Tribune, while taking issue with the Chaffetz’s plan on grounds that it does not include an increase in revenues, likes that the plan recognizes the intergenerational wealth transfer that is Social Security and that it acknowledges that need to retain Social Security’s solvency.

The wealthier among us might never benefit from Social Security in proportion to what they would pay in higher taxes. But they still have an interest in preserving the soundness of the system, and not only for the benefit of fellow citizens. Rich people who pay in enough to save Social Security now may well, like many of the rest of us, benefit greatly in the future if their huge incomes ever dry up. It happens.

Might the plan work?

In an age of entitlement expansion, Utah’s Rep. Jason Chaffetz is swimming against the flow. His proposed bill would help return solvency to the Social Security program without denying the promises that have been made to generations of Americans  paying into the system. It’s a real plan, it grapples with one of the toughest topic in national politics, and it makes great strides towards cutting through the Gordian knot that is Social Security.

Find the text of the bill here.

[Social Security Administration][NPR][Daily Herald][The Hill][Salt Lake Tribune]

Related articles
Filed Under: Entitlement Reform Tagged With: , , ,

Fiscal IQ: Got it?

December 8, 2011 By 4 Comments

I found an interesting little quiz online today, put out by the Comeback America Foundation. It tests “Fiscal IQ” and fiscal knowledge. Click here to take the test.  It only takes about five minutes, and I think you should take it.


After completing the five minute and 30-question quiz, participants are provided two scores (Fiscal Knowledge and Fiscal Wisdom) as well as an overall IQ score, which is the average of the Knowledge and Wisdom scores. For any questions they answer incorrectly, the test taker will receive information explaining why they were wrong. The Fiscal IQ Quiz can be found here.

The test is based on David Walker‘s  book on dealing with America’s fiscal crisis–”Comeback America” which I read earlier this year. It looks at how government policy should shift to deal with the massive and growing deficits caused by the 55% (and growing) of our federal budget that is on cruise-control to pay for entitlements like Social Security, Medicare, and Medicaid. As I wrote in May–

It is almost cliché for my generation to joke that  Social Security will be gone before we retire.  It may be a stretch, but it really is no joking matter. Social Security is in a bad way, and it is getting worse.

The number of Social Security recipients is  growing faster than the number of people paying into it. It is a likely scenario that the Social Security trust fund (which doesn’t really exist, anyway) will be gone by the time I stop paying in and start asking for it back.

Social Security is just one piece of the puzzle, though, and perhaps even the easiest piece. Nevertheless, it’s taken a maverick like Utah  Representative Jason Chaffetz to start talking about how to reform the bankrupt entitlement to make it sustainable for future generations. (ICYMI, the Social Security Administration is calling it a plan that will make Social Security solvent.)

Things haven’t changed much in the intervening seven months since I read Walker’s book, at least not for the better. Washington is still stalled, President Obama has not proposed a budget palatable to Republicans or Democrats on the Hill, and America’s debt has been downgraded (and while that makes debt cheaper, it doesn’t exactly endear us to creditors).  We’re still on cruise control, the “Super-Committee” demonstrated that they weren’t so super, and the most action we’ve seen is the occupation, and subsequent forced evacuation, of Wall Street.

Is anyone really surprised that Americans are angry?

Take the test. Education is the best remedy to ignorance, so send it to your Congressman or Congresswoman, as well.

Please share your results in the comments. I scored 80% on the Fiscal IQ part and 100% on the Fiscal Knowledge…go figure.

[Comeback America Initiative]

Related articles
Filed Under: Entitlement Reform Tagged With: , , ,

The Debt is Too Darn High

September 1, 2011 By Leave a Comment

Apparently, that thing about ostriches sticking their head in the sand is no joke. Nor is it without parallel in the human world.

The other day I cited a study by a several prominent economists. Their research argued, quite persuasively, that excessive debt tends to inhibit economic growth. They looked a thirty year period,  included the debt levels of households, corporations and of 18 OECD governments (such as the UK, Australia, Germany, Norway, Portugal, France, Italy…and so on), and analyzed the effect of the debt on economic growth.

It’s a very interesting study, and coming on the heals of the debt ceiling debate, it reiterated, if indirectly, the arguments many people have made: the debt is too high, and it will hurt our economy.

Still, some people managed to dismiss it. Blithely. The following bullet points are their points.

Never mind that the statement is internally contradictory, here are the facts:

After World War II, the US had lost 418,500 persons, or .32% of its population. With the exception of Pearl Harbor, no battles were fought over US soil, our industrial base had been increased over the course of the war, and US debt was held primarily by American citizens. Further, rationing was utilized and women entered the labor force for the first time in high numbers, filling the gap left by men serving in the armed forces.

Logo used on aid delivered to European countri...

Image via Wikipedia

In contrast, while the United States was building its industrial strength, the factories and infrastructure of the rest of the world was collapsing under bombs, bullets, and famine. While only .32% of the US population was killed in World War II (a smaller percentage than even the American Civil War, by the way),  the United Kingdom lost 450,900, or .94% of its population, three times as many killed as US killed. But even  that’s nothing. Recipient countries of the Marshall Plan (Austria, Belgium, Denmark, France, West Germany, the United Kingdom, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Sweden, Switzerland,  and Turkey) , the US’s aid program to rebuild Europe, were hit even worse. Austria lost 5.7% of its workforce, Germany between 8 and 10%, Greece between 4 and 11%, France 1.35%, Italy 1%, and Belgium 1%, to name a few. This doesn’t even account for the Soviet Union and its allies who were precluded from the Marshall Plan, or Japan.

Poland lost almost 17% of its population in the war. Lithuania and the Soviet Union each lost about 14% of their populations. In 1939 USSR terms, that means 23,000,000 total deaths.  China, while only losing between 2 and 4% of its population, still had casualties of over 20,000,000, greater than the combined populations of 1945 New York, Chicago, Philadelphia, Detroit, Los Angeles, Cleveland, Baltimore, St. Louis, and Boston. That to the American total casualties of under 500,000, few of which were civilian deaths.

To sum it up, the US left World War Two with high debt, a relatively untouched industrial base, few casualties compared with the rest of the world, and a global market decimated by  war. Is it any wonder we were able to grow dramatically after World War Two?

  • ” But what about crises? This data doesn’t take consider that were in a major crisis now, and we need to spend to get money into circulation.”

In the words of Bart Simpson, “Au contraire, mon frere.” The data actually controls for banking crises.  In fact, high debt may be the cause of such crises in the first place.

[R]elated to the crisis variable, we note that high levels of debt for a country as a whole or for one of its sectors may be a reason why a country may end up facing a banking crisis. But it may also be the reason why a given downturn, originating from events outside the country or the indebted sector, may turn out to be worse than it could have been otherwise. Using this variable thus allows us to check whether or not the effects of debt on growth are related with periods of financial stress.

Worse than it could have been otherwise…kind of makes you wonder if economic growth, which by all reports is now stalled, might be growing instead.

Ok, so I added that last part. The “evil” part.

As for failed, I’d hardly say that. In fact, that we are in the longest period of recession since the Great Depression, that we are increasing our public, person, and corporate debt at an unsustainable rate, and that economists and the credit rating bureaus are starting to engage in dialogue about unsustainable entitlement programs, all seem to show just one result: we need to change what we are doing.

The debt is just too darn high.

Frankly, this has nothing to do with Republicans or Democrats. It has to do with spending. As anyone who has read here with enough regularity knows, I don’t lay the blame for our high debt at the feet of Democrats alone. The Republicans have their pet projects, too, and neither party’s elected officials stand blameless.

However, I did not approach this as a partisan issue. I approached it from the perspective of reporting a highly credible report that just happens to support Republican stands during the debt ceiling debate.

Again, au contraire. This isn’t about what the government needs to do to help people get back to work. It’s what the government needs to stop doing to prevent them from getting back to work.

Don’t get me wrong. I believe that there is a place for government, that government can and does assist the economy, and that no government is a recipe for Somalia. No, I am not making a “smaller government” argument.

What I am arguing is this: the debt is too darn high.

Do I need to say it again? The DEBT IS TOO DARN HIGH.

And it’s hurting the economy.  Some debt is good. Debt, and My Better-half, put me through law school. But research is showing that at a certain level, too much debt begins to sap economic growth. It is, as the report states, a “double-edged sword.”

Enter the long quote:

As debt levels increase, borrowers’ ability to repay becomes progressively more sensitive to drops in income and sales as well as hikes in the interest rate. For a given shock, higher debt raises the probability of defaulting. Even for a mild shock, highly indebted borrowers may suddenly no longer be regarded as creditworthy. And when lenders stop lending, consumption and investment fall. If the downturn is bad enough, defaults, deficient demand and high unemployment might be the grim result. The higher the level of debt, the bigger the drop for a given size of shock to the economy. And the bigger the drop in aggregate activity, the higher the probability that borrowers will not be able to make payments on their non-state-contingent debt. In other words, higher debt raises real volatility, increases financial fragility and reduces average growth.

Hence, instead of high, stable growth with low, stable inflation, economies experience disruptive financial cycles, alternating between credit-fuelled booms and default-driven busts. When the busts are deep enough, the financial system collapses, bringing down the real economy too.

 So the recommendations?

Back to the study and the economists’ suggestions:

  1. Since aging drives up government expenditure (i.e. non-discretionary spending on Social Security, Medicare, Medicaid, etc), we need to increase our labor base. In other words, we need to streamline immigration. The immigration problem needs to stop being a problem so that people who want to work, pay into the system, and grow the economy are permitted to come here and do that.
  2. The United States—as a people, business environment, and government—needs to  shore up its financial markets so that it remains a low risk investment for emerging economies that have younger populations and higher savings rates.
  3. Free trade. The authors suggest that trade may “reduce the need for more radical changes in the composition of demand that aging otherwise brings.” But then, you  and I both know that free trade, as much as it works, is counterintuitive to the average voter.

What can you do? Save. Save. Save. Because, at the end of it all, savings is the only way out.

As with government debt, we have known for some time that when the private non-financial sector becomes highly indebted, the real economy can suffer.39 But, what should we do about it? Current efforts focus on raising the cost of credit and making funding less readily available to would-be borrowers. Maybe we should go further, reducing both direct government subsidies and the preferential treatment debt receives. In the end, the only way out is to increase saving.

[VIA]

Related articles
Enhanced by Zemanta
Filed Under: Entitlement Reform, Fiscal Reform Tagged With: , , , , , ,

Debt too high saps economic growth.

August 31, 2011 By 1 Comment

Debt. You don’t like it. I don’t like it. No one likes it.

And yet, without it, much of the prosperity and technological progress we rely upon would not be possible. Finance and the power of compound interest has thrust our economy forward faster than any in history. Yet, compound interest is not a tool you want to be used against you. As New York Times columnist Carl Richards notes, “It’s always been one of the most powerful forces in the financial universe.”

Don’t think it matters? Just consider the result of the downgrade of American credit:

Think about that for a minute. If those worst-case-scenario interest rates came to pass and persisted, we’d be approaching a trillion dollars in interest payments per year. That’s what compound interest looks like when it’s working against you.

If that trillion dollar number doesn’t do it for you (that’s 1,000,000,000,000), consider it on a more personal scale.

On a personal scale, you get a taste of it every month if you get careless with credit cards. Take a look at a bill. For every month you carry a balance, there’s a minimum payment required.

Use carefully, it’s a great tool for growth.

Without financing, countries–and businesses and families–are poor and stay poor. Whether it’s a student loan to get through college and get a job that pays better, a business loan to cover the cash flow gap between invoice and payment, or money to build infrastructure and fund the armed forces, finance is a necessary part of growth and getting out of poverty.

Yes, taking on debt creates vulnerabilities for any of these parties; however,  debt managed and controlled brings prosperity.

On the other hand, debt out of control creates financial crises. It stops = growth and harms economies.

When the ratio of debt to income rises to a certain level, a new study shows, financial crises–be it household debt, corporate debt, or a national government’s debt–”become both more likely and more severe.” In other words, too much debt is not a good thing.

Well, duh.

The study, entitled blandly but descriptively “The real effects of debt,” was reported by Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, economists at the Bank for International Settlements, at the “Achieving Maximum Long-Run Growth” Symposium in Jackson Hole last week.

I can only imagine that the report’s findings threw a lot of cold water on the “more stimulus/raise the debt ceiling” crowd (aka “New Keynesian orthodoxy” believers, according to the economists), including Fed Chairman Ben Bernanke, fresh back from scolding Republicans for their reticence to raise the debt ceiling.

Why? Because, at least in part, the finding vindicates Republican fears about the malignant effect debt can have, and is having, on the national economy.

From the Introduction:

Our result for public debt has the immediate implication that highly indebted governments should aim not only at stabilising their debt but also at reducing it to sufficiently low levels that do not retard growth. Prudence dictates that governments should also aim to keep their debt well below the estimated thresholds so that even extraordinary events are unlikely to push their debt to levels that become damaging to growth.

Emphasis my own.

Which leads to the question: at what levels does begin to hurt and retard growth? The empirical results of the study, based on review of debt levels in 18 OECD countries from 1980 to 2010, show that:

  • Households can handle a threshold of about 85% of debt to income.
  • For corporations (non-financial), the number is about 90%.
  • Governments can borrow between 80 and 100% of GDP.

But that’s just in the short-term. Looking at advanced economies–in other words, Western Europe and the United States, Japan, and Australia– the problem is

compounded by unfavorable demographics. The ageing of populations and the rise in dependency ratios have also the potential to slow growth, making it more difficult to escape the negative debt dynamics that are now looming.

In other words, in our economy more of our population is getting old and few children are being born, which means that Social Security, Medicare, and Medicaid all have fewer  people paying for them and more and more people drawing on them.

If I’ve learned nothing from leaving the bachelor world for the role of a family man, buying too many Happy Meals for the kids may make me feel good, but it’s more expensive than a BBQ at home, and its less healthy, too. And when costs are going up faster than my income, that’s not the time to go out and get more debt.

What is our current federal debt ratio to GDP, then? Check out the chart below, and how it compares over our history. Note that, prior to recent history, the level of debt is only comparable to times when we have been at war.

World wide war.

In the meantime, we’ve become addicted to the Happy Meals as a national economy. While Social Security, Medicaid, and Medicare were all begun with the laudable, and often successful, goal of caring for the poor, sick, and elderly, they have expanded to bloat our national budget to a place where our ability to help those needy groups will someday become questionable.

And I do emphasis will. It is inevitable that if we continue on our current track we will be unable to aid those in need. The time for reform was last year, and the longer we delay, the more difficult it will be. We’re not getting any younger as a nation, and we’re not getting any richer either.

The debt is just too damn high.

[via CNBC, New York Times, and BIS]

Related articles
Enhanced by Zemanta
Filed Under: Entitlement Reform, Fiscal Reform Tagged With: , , , , , , , , ,

Perspectives on last week’s debt debate: two sides of the same coin

August 3, 2011 By Leave a Comment

How the “left” sees the recent debt ceiling debate/crisis…

And how the “right” sees it…

Is it any surprise that the politicians had a hard time finding a middle ground? They don’t see eye to eye on what the problem is in the first place.

Also, what’s with this “super committee” that’s lacking any deficit hawks? Or Rep. Jason Chaffetz, for that matter? No, seriously. Why is he not on it.


The title “Super Committee” is a bit over-reaching given the fact that I’m not on it. #utpol
August 3, 2011 11:22 AM via TwitterrificReplyRetweetFavorite

In the meantime, Utah has its act together. Wonder if the feds might take a page from our book?

(h/t to Geeks are Sexy)

Related articles
Enhanced by Zemanta
Filed Under: Entitlement Reform, Fiscal Reform Tagged With: , , , , , , , , , , , , , ,

From the WSJ: “Republicans and Mediscare”

May 24, 2011 By Leave a Comment
WASHINGTON, DC - APRIL 05: U.S. Rep. Paul Ry...

Image by Getty Images via @daylife

The reality is that Medicare “as we know it” will change because it must. The issue is how it will change, and, leaving aside this or that detail, the only alternatives are Mr. Ryan’s proposal to introduce market competition or Mr. Obama‘s plan for ever-tightening government controls on prices and care. Republicans who think they can dodge this choice are only guaranteeing that Mr. Obama will prevail.

via Review & Outlook: Republicans and Mediscare – WSJ.com.

Also, “Why Gingrich has no chance to win the nomination for the White House.”

Related articles
Enhanced by Zemanta
Filed Under: Entitlement Reform Tagged With: , , , , , , ,

Entitlement Reform: Start with Social Security

May 10, 2011 By 1 Comment
INFOGRAPHIC - Why Social Security Needs To Be ...

Image by Third Way via Flickr

It is almost cliché for my generation to joke that  Social Security will be gone before we retire.  It may be a stretch, but it really is no joking matter. Social Security is in a bad way, and it is getting worse.

The number of Social Security recipients is  growing faster than the number of people paying into it. It is a likely scenario that the Social Security trust fund (which doesn’t really exist, anyway) will be gone by the time I stop paying in and start asking for it back.

[Read more...]

Filed Under: Entitlement Reform Tagged With: , , , , , , , , , , , , , ,

Cutting Non-Defense Discretionary Spending Just Isn’t Enough

April 1, 2011 By Leave a Comment

Cutting discretionary spending alone is not going to solve our fiscal woes. Entitlement reform must happen if we’re to maintain our economic strength.

That, or raise taxes. A lot.

Related articles
Filed Under: Entitlement Reform Tagged With: , , , , , , , , , , ,
Next Page »