There are two graphs that show what the problem is and will be.
First the ratio of Debt Held by the Public to GDP from 2000 thru 2009. This is below:
Second is the ratio of Debt Held by the Public to GDP from 2007 thru 2018. This is shown below:
Now despite the 9/11 attack, the two wars, the tax cuts and every thing that the economists have bemoaned about Bush II we have a ratio kept around 30%. It does not grow until the financial or banking crisis hits. Then in the current Administrations proposals it explodes to almost 70% which is more than 2 time what it has been. Why is this happening. We have already paid out the financial funds, Medicare and SSI is NOT included in this debt since that is Intragovernmental and is another set of numbers. So why!
In addition once you get started there is no way given the economics brainpower in Washington that they ever can put a stop at even 70%. Things always overshoot. One must read the CBO report to better understand, but I feel the CBO is optimistic at best.
The CBO states:
"The dramatic expansion of the deficit in 2009 (up from 3.2 percent of GDP in 2008) results from a projected rise in outlays of 24 percent (the largest percentage increase since 1952) and a drop in revenues of 17 percent from last year’s levels (the largest percentage drop since 1932).
Those changes have largely been the result of the severe economic downturn and the fiscal impact of federal policies enacted in response. On the basis of tax collections through July 2009, CBO expects federal revenues to decline by more than $400 billion from last year’s total. Revenues are projected to be 14.9 percent of GDP, nearly 3 percentage points below the 2008 level (see Summary Table 1).
Although CBO anticipates declines in almost all sources of revenue, the decrease is largely attributable to the drop in receipts from individual income taxes (which are expected to fall from 8.1 percent of GDP to 6.5 percent) and corporate income taxes (which are estimated to decline from 2.1 percent of GDP to 1.0 percent).
Outlays will rise by about $700 billion this year, in CBO’s estimation. Much of that increase results from legislation enacted in calendar year 2008 in response to turmoil in the housing and financial markets—in particular, $133 billion for the Troubled Asset Relief Program (TARP) and $291 billion for the estimated costs of placing Fannie Mae and Freddie Mac into conservatorship.
CBO expects that total spending in 2009 from funding provided by the American Recovery and Reinvestment Act (ARRA, Public Law 111-5) will reach about $115 billion."
Thus we have decreasing revenue and increasing financial commitments to Government programs that went south. This is NOT a problem from banks, nor is it a Medicare/SSI problem, it is a problem resulting from legislation.
The CBO echos our concern:
"Both in dollar terms and in relation to the size of the economy, the imbalance in the budget projected for 2009 is significantly larger than at any time since World War II. At $1.6 trillion, the expected deficit for this year will be nearly three and a half times the size of last year’s deficit of $459 billion. As a percentage of GDP, the 2009 deficit will be almost twice as large as any deficit in the past 60 years."
One of the major problem areas is the GSE, the Fannie and Freddie problems. The CBO states:
" Beginning in 2009, CBO is accounting for the GSEs’ operations in its budget projections by computing the present value of anticipated cash flows using an appropriate discount factor that recognizes the riskiness of those cash flows. On the basis of projections of the entities’ assets and liabilities over the long term, CBO estimates that including their operations in the budget will increase the federal deficit by $291 billion this year and by about $100 billion cumulatively between 2010 and 2019."
The second major drain is the Stimulus package which the CBO says:
"In February 2009, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimated that the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5) would increase deficits by $787 billion over the 2009–2019 period. About $575 billion of that 11-year total would stem from increased outlays and $212 billion from reduced revenues.1 For fiscal year 2009, which ends on September 30, CBO estimated that the net impact on the deficit would be $185 billion—a reduction of $65 billion in revenues and an increase of $120 billion in outlays. CBO has not completed a comprehensive update of its original estimate of the stimulus package. Indications to date are that, in total, the budgetary effects have occurred at about the pace CBO anticipated when it prepared its initial estimates."
The CBO then seaks of Medicare and SSI:
"Spending for Social Security, Medicare, and Medicaid will have to be controlled to achieve a sustainable fiscal situation in future decades. Last year, outlays for those three programs combined (not including offsetting receipts) accounted for about 9 percent of GDP. Spending for those programs is expected to rise rapidly over the next 10 years, outstripping the growth of GDP. By 2019, such spending is projected to total nearly 12 percent of GDP. Under long-term projections recently published by CBO, spending for those programs would continue to rise and could total almost 17 percent of GDP by 2035 if no changes are made to current law."
The dominant driver is the assumed explosion in Medicare due to organic health care costs increases. Again we remind the reader that as of now Medicare has been over funded by the recipient and SSI exorbitantly overfunded. The problem is Medicare organic unit health care cost increases. The real problem is that the Intragovernmental accounts will be exploding on top of these Debt in Public Hands accounts as well.
The real set of problems is the Stimulus and the GSE support. The remaining stimulus should be withdrawn, it is essential since it will drag down the economy. We have argued this since day one. Second the GSEs should be privatized, slowly but they must be taken off the books of the Government and kept off. These two simple steps will dramatically reduce the debt to GDP ratio.
First the ratio of Debt Held by the Public to GDP from 2000 thru 2009. This is below:
Second is the ratio of Debt Held by the Public to GDP from 2007 thru 2018. This is shown below:
Now despite the 9/11 attack, the two wars, the tax cuts and every thing that the economists have bemoaned about Bush II we have a ratio kept around 30%. It does not grow until the financial or banking crisis hits. Then in the current Administrations proposals it explodes to almost 70% which is more than 2 time what it has been. Why is this happening. We have already paid out the financial funds, Medicare and SSI is NOT included in this debt since that is Intragovernmental and is another set of numbers. So why!
In addition once you get started there is no way given the economics brainpower in Washington that they ever can put a stop at even 70%. Things always overshoot. One must read the CBO report to better understand, but I feel the CBO is optimistic at best.
The CBO states:
"The dramatic expansion of the deficit in 2009 (up from 3.2 percent of GDP in 2008) results from a projected rise in outlays of 24 percent (the largest percentage increase since 1952) and a drop in revenues of 17 percent from last year’s levels (the largest percentage drop since 1932).
Those changes have largely been the result of the severe economic downturn and the fiscal impact of federal policies enacted in response. On the basis of tax collections through July 2009, CBO expects federal revenues to decline by more than $400 billion from last year’s total. Revenues are projected to be 14.9 percent of GDP, nearly 3 percentage points below the 2008 level (see Summary Table 1).
Although CBO anticipates declines in almost all sources of revenue, the decrease is largely attributable to the drop in receipts from individual income taxes (which are expected to fall from 8.1 percent of GDP to 6.5 percent) and corporate income taxes (which are estimated to decline from 2.1 percent of GDP to 1.0 percent).
Outlays will rise by about $700 billion this year, in CBO’s estimation. Much of that increase results from legislation enacted in calendar year 2008 in response to turmoil in the housing and financial markets—in particular, $133 billion for the Troubled Asset Relief Program (TARP) and $291 billion for the estimated costs of placing Fannie Mae and Freddie Mac into conservatorship.
CBO expects that total spending in 2009 from funding provided by the American Recovery and Reinvestment Act (ARRA, Public Law 111-5) will reach about $115 billion."
Thus we have decreasing revenue and increasing financial commitments to Government programs that went south. This is NOT a problem from banks, nor is it a Medicare/SSI problem, it is a problem resulting from legislation.
The CBO echos our concern:
"Both in dollar terms and in relation to the size of the economy, the imbalance in the budget projected for 2009 is significantly larger than at any time since World War II. At $1.6 trillion, the expected deficit for this year will be nearly three and a half times the size of last year’s deficit of $459 billion. As a percentage of GDP, the 2009 deficit will be almost twice as large as any deficit in the past 60 years."
One of the major problem areas is the GSE, the Fannie and Freddie problems. The CBO states:
" Beginning in 2009, CBO is accounting for the GSEs’ operations in its budget projections by computing the present value of anticipated cash flows using an appropriate discount factor that recognizes the riskiness of those cash flows. On the basis of projections of the entities’ assets and liabilities over the long term, CBO estimates that including their operations in the budget will increase the federal deficit by $291 billion this year and by about $100 billion cumulatively between 2010 and 2019."
The second major drain is the Stimulus package which the CBO says:
"In February 2009, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimated that the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5) would increase deficits by $787 billion over the 2009–2019 period. About $575 billion of that 11-year total would stem from increased outlays and $212 billion from reduced revenues.1 For fiscal year 2009, which ends on September 30, CBO estimated that the net impact on the deficit would be $185 billion—a reduction of $65 billion in revenues and an increase of $120 billion in outlays. CBO has not completed a comprehensive update of its original estimate of the stimulus package. Indications to date are that, in total, the budgetary effects have occurred at about the pace CBO anticipated when it prepared its initial estimates."
The CBO then seaks of Medicare and SSI:
"Spending for Social Security, Medicare, and Medicaid will have to be controlled to achieve a sustainable fiscal situation in future decades. Last year, outlays for those three programs combined (not including offsetting receipts) accounted for about 9 percent of GDP. Spending for those programs is expected to rise rapidly over the next 10 years, outstripping the growth of GDP. By 2019, such spending is projected to total nearly 12 percent of GDP. Under long-term projections recently published by CBO, spending for those programs would continue to rise and could total almost 17 percent of GDP by 2035 if no changes are made to current law."
The dominant driver is the assumed explosion in Medicare due to organic health care costs increases. Again we remind the reader that as of now Medicare has been over funded by the recipient and SSI exorbitantly overfunded. The problem is Medicare organic unit health care cost increases. The real problem is that the Intragovernmental accounts will be exploding on top of these Debt in Public Hands accounts as well.
The real set of problems is the Stimulus and the GSE support. The remaining stimulus should be withdrawn, it is essential since it will drag down the economy. We have argued this since day one. Second the GSEs should be privatized, slowly but they must be taken off the books of the Government and kept off. These two simple steps will dramatically reduce the debt to GDP ratio.
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