The Money Pot

On Dec. 1st, the bipartisan National Commission on Fiscal Responsibility and Reform (Debt Commission) will hold its sixth meeting to hammer out a series of proposals to reduce both the deficit and debt of this country.  Deficit refers to the current year’s budget imbalance, while debt is the sum of each year’s deficit.  You can watch previous meetings here.

Earlier in November the two co-chairs presented a draft proposal which distributes the pain of both budget cuts and higher taxes in an equitable fashion.  Of course, any constituency who suffers from the cuts or has to pay the higher taxes will not like a particular proposal – a NIMBY syndrome that has infected this country.

Why bother planning for the future?  Why not just wait till things get really bad and we have a Treasury Bond crisis, where other countries start selling their holdings of this country’s debt and the government has to pay high interest rates just to get anyone to buy the debt?  Ireland and Greece have tried that method and it has gotten ugly as each of those governments has had to make severe reductions in social security pensions and other benefits.  By planning ahead, we can make more gradual reductions but regardless of what we do, we will be reducing benefits and raising taxes.  Elected politicians of both parties have been making promises, and “bringing home the bacon” to their constituents for several decades.  They have done this by spending the social security taxes – essentially making it a flat tax for the general fund – that the large numbers of “boomers” have been paying in.  The boomers are nearing retirement age.

Here is the Congressional Budget Office (CBO) projection of this country’s debt and the effect of the Debt Commission’s proposals on the debt. (Click to enlarge in separate tab)

Here is a summary of the proposals, excluding any Social Security reforms.

As people are living longer, it makes sense to consider raising the full retirement age.  But this recent report by the Government Accountability Office (GAO) shows that such a seemingly simple solution has consequences that I had not considered.  They found that a quarter of the pre-retirement aged population had some work limiting condition and that two thirds of them work a physically demanding job.  The GAO thus anticipates a rise in disability, unemployment, food stamp, Medicaid and other benefit claims as this older population is unable to find work that they can reasonably perform.  The percentage of work restricted workers would only grow as we raise the retirement age.  The more sensible and fair solution is to reduce benefits and eliminate the early retirement option introduced in the 1960s.

When the Social Security system was enacted in the mid thirties, life expectancy for a 60 year old worker was 72.  (Bureau of Labor Statistics Monthly Labor Review, pg. 4)  In 2006, the Census Bureau estimated life expectancy for a 60 year old at 82, an additional ten years of life – and retirement benefits.

It is going to take character for many politicians to take on Social Security reform but it must be done if we are to get our financial house in order.  The last time the system was reformed was in 1983, when Democrats held a sizeable majority in the House and Republicans controlled the Senate.  The full retirement age was raised to 67 on a sliding scale and the payroll tax was increased.  Since then we have seen that increasing the payroll tax is but a flat tax, an excuse for our elected representatives to spend ever more money that they don’t have.  Any increase in payroll taxes would have to be accompanied by a complete divorce of the Social Security trust fund and the general revenue fund of this country. 

To hide the cost of the Vietnam war, President Johnson in the late sixties instituted the “unified budget” so the Federal government could take in payroll tax revenues, put them in the general fund, issue paper IOUs and spend the money on the war without arousing public anger.  Ever since, politicians have been hiding the size of real budget deficits.  Even when this country last had a “surplus” in the Clinton years, it was only a surplus because of the huge Social Security surplus.  The real budget ran a deficit.

Will we grow up, wake up and take some responsibility or will we continue to keep thrusting our hands into the Federal pot of money, trying to get as much as we can?  For too many years we have behaved as shoppers did last Friday morning at a Wal-Mart in Honolulu, pushing and shoving to get the best deal, then trying to take deals away from other people when there were no more to be had.

Foreclosure or Not so sure?

Anyone about to put a contract on a house today, particularly those in foreclosure, should check with a title company to see if there is any problem getting title insurance on the proposed property.  During the process of packaging and repackaging mortgages into securities called mortgage backed securities (MBS), some banks and mortgage servicers may have lost the paperwork that proves that they have a claim on the property.  

In a recent NY Times article veteran business reporter Gretchen Morgenson relates the recent legal challenges to some bank foreclosures in bankruptcy courts.  In some cases the trustee judges who oversee bankruptcies have concurred that the bank trying to foreclose does not have a proper “chain of title.”

Some in the banking industry dismiss these claims as isolated instances but there are whispers that the “chain of title” issue could grow enormously if courts reverse their long standing partiality toward banks and use the same burden of proof standard that they have long taken with homeowners.


No, it’s not the Queen Elizabeth, either the person or the ship.  It’s Quantitative Easing, a label for the Federal Reserve’s program to print money.  Matt sent me a link to a funny – and ironically sad – video that explains this phenomenon.

Asset Bubbles

Earlier today, I examined the twin problem of spending and revenue.  What about that “hump” in revenue for the years 2004 to 2008?  Was it the Bush tax cuts?  Politicians drinking the Republican juice often repeat the mantra that tax cuts produce more revenue.  If only it were true.  The revenue hump consists chiefly of the taxes from capital gains that occurs during any asset bubble.  We had a similar spike in capital gains taxes during the stock market bubble of the late nineties.  Below is a chart of IRS data of capital gains reported during the past decade. 

As the Federal Reserve continues its stimulus attempts to revive demand by pumping money into bonds and lowering the value of the dollar, it drives up asset prices like stocks.  When investors sell those assets which are in non-tax sheltered accounts, the sale often generates a capital gain which generates revenue for the Treasury.

Voters have conflicting views of the Obama stimulus program initiated in the spring of 2009.  However, it is the Federal Reserve that has pumped in double the total amount (some of it not spent yet) of Obama’s stimulus program and most of that amount was put in before Obama took office.  Here’s a quick chart of the balance sheet of the Federal Reserve.  Click on the “All” tab on the second chart.  Good thing that the Federal Reserve members do not have to run for Congress.

Twin Horns of an Angry Bull

On Fox News Sunday today, Eric Cantor, the current Republican whip and projected majority leader in the next Congress, stated that “we do not have a revenue problem. We have a spending problem.”

Below is a 10 year chart of Federal Revenues, excluding Social Security taxes (Source). Using CPI adjustment factors from the Bureau of Labor Statistics, I have shown revenues in constant 2000 dollars, or real dollars. Mr. Cantor does not think this is a “revenue problem.” I would not want Mr. Cantor as my accountant. (Click to enlarge in separate tab)

The real picture is that we have BOTH a revenue problem and a spending problem.

Below is a chart of defense spending in the past 10 years. In real dollars, it has almost doubled.

Next is a chart of human resource spending. I have excluded most of Social Security and Medicare. It has more than doubled in the past ten years.

Let’s imagine that you and your family were sitting at the kitchen table looking at similar charts of your finances. Your family income is about the same as it was 8 years ago yet your chief expenses have doubled. It’s obvious that your family will have to cut spending. It is also clear that you are going to have to find a way to bring in more money. Now imagine the budget fight when you suggest that you are going to cancel the data plan for your teenage daughter’s cell phone. How will you feel when your spouse suggests selling the newer model car you drive to work and buying an older compact car? What is your spouse’s reaction when you suggest that he or she deliver pizzas at night after work? These are tough discussions at the kitchen table or in the halls of Congress.