Following up on Austin Pryor's Monday post that mentioned the new budget plan put forward by Rep. Paul Ryan, chairman of the House Budget Committee, let me steer you to three resources that provide more information about the plan. Titled "The Path to Prosperity," the plan sets forth a strategy for cutting $6.2 trillion from currently projected federalspending over the next decade.
The full text of the plan (a 73-page PDF file) is here.
Chairman Ryan offered a summary of his plan in yesterday's Wall Street Journal.
The House Budget Committee has released a brief video that lays out the essence of "The Path to Prosperity."
I know some readers get a little stirred up when we post on "political" issues such as the federal budget, U.S. entitlement programs, and taxes. Although we try to address these issues in a factual, non-emotional way, I'm sure our sense of balance isn't satisfactory to all of our readers.
So the question could be reasonably asked, why bother commenting on such issues at all? Here's why. From a recent survey (PDF) of "likely voters" done by the Tarrance Group:
There are widespread misperceptions about the state of the federal budget.
A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%).
Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse.
Voters do not casually agree with these untruths — at least 40% strongly agree. Further, less than half (44%) believe Medicare and Social Security costs are a major source of problems for the federal budget (49% disagree).
If nothing else, I hope our occasional posts on these subjects have helped educate SMI's readers that the scope of what we're facing is significantly bigger than "eliminating waste, fraud, and abuse" or trimming a little off defense and foreign aid (though those may be worthy goals).
We've got a significant budget problem. I still believe that there's time to fix it and that it can be done without massive upheaval and deep pain. But it's not going to happen if the American people continue to fail to understand the real issues involved.
Hopefully our country will figure out a way to focus this discussion more on the math and make it less about party ideology.
Kleiner Perkins Caufield & Byers (KPCB), one of the world's largest venture capital firms, has issued a sobering report on the financial challenges now facing a well-known entity that has been around for a more than 200 years. That entity is the United States government.
KPCB researcher and strategist Mary Meeker has put together an "income statement and balance sheet" for Uncle Sam, and it's not a pretty picture. Her report includes a two-page foreword (by George P. Shultz, Paul Volcker, Michael Bloomberg, Richard Ravitch and John Doerr), a 12-page text summary and 460 PowerPoint slides.
Here is one of those slides, followed by part of the text summary:
(click to enlarge)
Imagine for a moment that the United States government is a public corporation. Imagine that its management structure, fiscal performance, and budget are all up for review. Now imagine that you're a shareholder in USA Inc. How do you feel about your investment?....
If we were long-term investors, how would we evaluate the federal government's business model, strategic plans, and operating efficiency? How would we react to its earnings reports?.... [F]ew of us take the time to dig into the numbers of the entity that, on average, collects 13% of our annual gross income (not counting another 15-30% for payroll and various state and local taxes)....
By the standards of any public corporation, USA Inc.'s financials are discouraging. True, USA Inc. has many fundamental strengths.... But cash flow is deep in the red (by almost $1.3 trillion last year, or -$11,000 per household), and USA Inc.'s net worth is negative and deteriorating....
Since the Great Depression, USA Inc. has steadily added "business lines" and, with the best of intentions, created various entitlement programs.... Apart from Social Security and unemployment insurance, however, funding for these programs has been woefully inadequate — and [is] getting worse.
Entitlement expenses amount to $16,000 per household per year, and entitlement spending far outstrips funding, by more than $1 trillion (or $9,000 per household) in 2010....
Regardless of the emotional debate about entitlements, fiscal reality can't be ignored — if these programs aren't reformed, one way or another, USA Inc.'s balance sheet will go from bad to worse.
None of the information in the report is truly new. Larry Burkett, who was honored posthumously last week at the annual National Religious Broadcasters convention, was writing about these same issues nearly 20 years ago. But the KPCB report offers a clear and sobering reminder that time is running out.
Today, the United States spends roughly 76 cents of every federal tax dollar on just four things: Medicare, Medicaid, Social Security and interest on the $14 trillion debt. That leaves 24 cents of revenue to pay for everything else the federal government does. ...
Barring serious efforts to curb the growth in the country's debt, by 2020 Washington could be spending 92 cents of every tax dollar on Medicare, Medicaid, Social Security and interest alone. That would leave just 8 cents to pay for everything else.
It's easy to gripe about government spending and to rail against it generally. It's very hard to figure out how specifically to reduce Medicare, Medicaid, and Social Security. And yet these are the three areas within our direct control that are going to soak up most of the dollars (interest really isn't within our direct control anymore — that money is spent and interest rates will be dictated by the markets).
Any spending cuts are welcome at this point. But we have to realize — and soon — that spending cut proposals that don't reach to these three specific programs simply aren't going to be enough.
May God give us wisdom and the strength to make the hard decisions that lay ahead.
Once a year, the Congressional Budget Office releases a report that looks ahead at the federal budget situation over the decade ahead. The latest Budget and Economic Outlook (PDF—190 pages) came out last week, and (not surprisingly) the news isn't exactly encouraging.
Excerpts:
The United States faces a daunting fiscal outlook, both for the next few years and for the long term. The Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion for fiscal year 2011, about $200 billion more than the deficit recorded in 2010....
The accumulating deficits [over the next several years] will significantly boost federal debt held by the public. Over the course of fiscal year 2010, debt held by the public jumped from $7.5 trillion to $9.0 trillion. By the end of 2011, CBO projects, that figure will be $10.4 trillion and, at 69 percent of GDP, the highest level since 1950.
[D]ebt held by the public is projected to continue its upward climb, reaching $18.3 trillion...by the end of 2021. With such a large increase, along with an anticipated rise in interest rates as the economic recovery strengthens, interest payments on the debt are expected to skyrocket. CBO projects that the government's yearly net interest spending will more than triple between 2011 and 2021 (from $225 billion to $792 billion).
Interestingly, the report notes, if it weren't for those skyrocketing interest payments, yearly deficits would shrink significantly over the next several years, with outlays eventually almost matching revenues by 2017. But, of course, interest must be counted.
And there's more:
Beyond the 10-year projection period, further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federalspending as a percentage of GDP well above that in recent decades.
In particular, spending on the government's major mandatory health care programs — Medicare, Medicaid, CHIP, and health insurance subsidies to be provided through the new insurance exchanges — along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt....
[A] growing federal debt...would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors' confidence faltered, giving legislators warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. Indeed, because interest rates on Treasury securities are unusually low today, such a crisis does not appear imminent in the United States.
But as other countries' experiences show, investors can lose confidence abruptly and interest rates on government debt can rise sharply and unexpectedly....
[T]here is no way to predict with any confidence whether and when such a crisis might occur and no identifiable tipping point of debt relative to GDP. However, the risk of a crisis probably will increase when investors' growing confidence in the global recovery and the stability of the financial system increases their desire to hold private securities and foreign debt rather than Treasury securities.
A report such as this is, by nature, speculative. Accurate 10-year forecasting is impossible. That said, the overall budgetary trend is indisputably unsound — and the results could be dire.
SMI's assistant editor Joseph Slife, who's been tracking federalspending issues for more than 20 years (he did research for Larry Burkett's 1990's bestseller, The Coming Economic Earthquake), has been reading "The Moment of Truth" (PDF) — the report issued last week by the National Commission on Fiscal Responsibility and Reform (aka the deficit commission).
In a discussion yesterday with host Bob Crittenden on The Meeting House (on Alabama's Faith Radio), Joseph explained why the report is proving to be so unpopular — and why some of its recommendations may be sorely needed.
Not surprisingly, the approach suggested is to make modest adjustments over an extremely long period of time. The retirement age would continue to rise, to 68 by roughly 2050 and 69 by 2075. Benefits would gradually be scaled back for wealthier recipients. Cost-of-living adjustments would be tweaked. The taxable wage base would be gradually broadened. More workers would be added to the system (new state and local workers after 2020 — didn't know they weren't already included).
Naturally, most everyone will find something to hate about this proposal (as they will with the broader list of recommendations).
That's what happens when compromise is required to solidify a budget, which is exactly what we're talking about here. Everyone smiles when it is expanded, and grimaces when it needs to be constrained. (Sounds pretty similar to every budgeting discussion we've ever had in my house.)
What's most striking to me in reading the Social Security recommendations, as well as the broader plan, is how doable all this sounds. I mean, really. For all the end-of-the-world-as-we-know-it carrying on of recent years, these changes really aren't that tough. (That's not to say we shouldn't all immediately go protest in the streets and burn stuff, as seems to be the popular response around the globe.) We're not talking about distributing ration cards here.
But for any of this to get passed, I think it'll all have to happen as one big package, and that concerns me because I'm not sure our politicians are serious enough to get something that significant done.
Taken together, most of the provisions put forth in these proposals seem pretty reasonable. There's a mix of distasteful medicine in there for everyone — rich, poor, old, young, Democrats, Republicans. And as long as everyone feels like this is legitimately a shared sacrifice, I think the people will accept it. (Wishful thinking?)
But if these provisions start getting split up into smaller proposals, forget it. That's when the problems start. Because if that happens, the seniors will get their legislators to kill the tough SS and Medicare stuff, the realtors will get their legislators to kill the home-mortgage deduction provision, the farm states will get theirs to kill the agricultural stuff, etc., etc.
Still in all, I'm encouraged by this report. There's nothing ruinous in here. Now granted, it doesn't solve all our fiscal problems either. But if we can get anything close to this passed, we'd be taking a huge step forward, one that would likely take a huge weight off the country's shoulders. If nothing else, it would help a great deal in turning the psychology around from the "we're all doomed, it's just a matter of time" feeling a lot of Americans have been carrying the past few years.
It can be done. Something like this is doable. Will our representatives rise to the challenge? That's the real question.
The final version isn't due for three more weeks, but the co-chairs of the National Commission on Fiscal Responsibility and Reform (i.e. the White House deficit commission) issued their preliminary recommendations yesterday — and the howls of protest have begun.
"There are things in there that I hate like the devil hates holy water," Democrat Sen. Richard Durbin (Illinois) fumed — despite the fact that he serves on the commission. Outgoing House Speaker Nancy Pelosi (D-Calif.) called the recommendations "simply unacceptable."
(At right are a two tables — prepared by the Wall Street Journal — listing many of the draft plan's suggestions that would cut $200 billion in spending in 2015.)
Half-way around the world, in South Korea, President Obama "urged leaders of his own Democratic Party to hold their fire over the recommendations," according to the WSJ. "Before anybody starts shooting down proposals, we need to listen, gather up all the facts, and be straight with the American people," he said.
You can get fuller details on the draft plan's recommendations here (PDF), but the Journaloffers this summary:
[I]n its current form [the plan] would end or cap a wide range of breaks relied on by the middle class — including the deduction for home-mortgage interest. It would tax capital gains and dividends at the higher rates now levied on wage income. To compensate, one version of the plan would dramatically lower and simplify individual rates, to 9%, 15% and 24%.
For businesses, the controversial plan would significantly lower the corporate tax rate — from a current top rate of 35% to as low as 26% — but also eliminate a number of deductions....
Overall, the plan would hold down the growth of the federal debt by roughly $3.8 trillion by 2020, or about half of the $7.7 trillion by which the debt would have otherwise grown by that year, according to commission staff. The current national debt is about $13.7 trillion.
Other proposals include gradually raising retirement for full Social Security benefits to 68 by 2050 and 69 by 2075 and effectively cutting SS benefits for wealthier retirees by changing how benefits are taxes.
Always one for a colorful quote, commission co-chair Alan Simpson, a retired Republican senator from Wyoming, offered a metaphor that evoked Captain Ahab's quest for Moby Dick: "We have harpooned every whale in the ocean, and some of the minnows," he said.
Some conservatives, such as Grover Norquist of Americans for Tax Reform, castigated the recommendations as too heavy on tax increases and too light on spending cuts. But many Republicans held their fire.
"This is a provocative proposal, and while we have concerns with some of their specifics, we commend the co-chairs for advancing the debate. We will continue to work toward solutions that help spur economic growth and restrain the explosive growth of government spending," three House Republicans who serve on the commission, Reps. Dave Camp of Michigan, Paul Ryan of Wisconsin and Jeb Hensarling of Texas, said in a joint statement.
In contrast, Ms. Pelosi, other congressional Democrats, union leaders and liberal advocacy groups laid into the chairmen's conclusions, declaring them dead on arrival.
The WSJ notes that "[m]any of the plan's more provocative elements are intended as starting points for negotiation, not final recommendations." You can expect those negotiations to be boisterous.
The members of the deficit commission (most are members of Congress) are listed here.
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So the question could be reasonably asked, why bother commenting on such issues at all? Here's why. From a 
Naturally, most everyone will find something to hate about this proposal (as they will with the broader list of recommendations).
"There are things in there that I hate like the devil hates holy water," Democrat Sen. Richard Durbin (Illinois) fumed — despite the fact that he serves on the commission. Outgoing House Speaker Nancy Pelosi (D-Calif.) called the recommendations "simply unacceptable."
Other proposals include gradually raising retirement for full Social Security benefits to 68 by 2050 and 69 by 2075 and effectively cutting SS benefits for wealthier retirees by changing how benefits are taxes.
