The Coming Fiscal Train Wreck

The Congressional Budget Office recently put together a document detailing the dreadful state of fiscal affairs. This chart shows the projections in their "Extended Baseline" scenario, which assumes that policies continue on their current course. It appears to me that they have borrowed a lot of the numbers for the next several years from Obama's budget; as such I figure that they are being overly optimistic about the decline in revenues as a share of GDP that starts next year, and they are also being overly optimistic about the surge in revenues next year. Therefore, the budget deficit is going to be far worse than the CBO's estimates, which are already absymally bad:

The current recession has little effect on long-term projections ... CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of these deficits, federal debt held by the public will soar from 41 percent of GDP at the ned of fiscal year 2008 to 60 percent at the end of fiscal year 2010.

If outlays grew as projected and revenues did not rise at a corresponding rate, annual deficits would climb and federal debt would grow significantly. Over time, the accumulation of debt would seriously harm the economy.

They go on to note that it is almost unimaginable to think that, in the absence of spending cuts, taxes could rise by enough to keep the deficit within reasonable ranges, since "tax rates would have to reach levels never seen ... (and) would slow the growth of the economy, making the spending burden harder to bear." As they further note, the most important factors driving the mega-expansion of federal spending in coming decades are Medicare, Medicaid, and Social Security.

Obviously these trends are unsustainable, so something will have to change. Roger Altman made the case for higher taxes in yesterday's WSJ, and it's a safe bet that Obama realizes he is going to have to break his campaign pledge to not raise taxes on anyone making less than $250K a year. But taxes can't possibly close the gap we're looking at here. Something is going to have to be done to curtail the growth of federal entitlement programs.

And that's a very good reason why Obamacare is about the most irresponsible thing our "responsible" president could possibly come up with. It would only make a very bad situation impossible.

There is no shortage of alternatives, fortunately, but there is a shortage of political will. Here are some relatively simple solutions that could go a long way to avoiding the train wreck: 1) privatizing social security (allow people to opt out if they want), 2) raising the retirement age for social security benefits, 3) adjusting retirement benefits for inflation instead of the growth of real wages, 4) changing the tax code to eliminate the third party payer problem for healthcare, and 5) allowing insurance companies to sell healthcare policies across state lines.

The net effect of these measures would be to get government out of the business of providing retirement and healthcare benefits, thereby letting individuals and private markets find a more efficient and workable solution.

Comments

[User 353732:]

Given the analysis you present a reasonable conclusion is that:
1. Four things will increase: taxes, inflation, government repression of free markets and free speech and and class warfare
2. Four things will decrease: size of the middle class, value of the dollar, quality of life(for 90% of Americans) and US geo-strategic stature
The top and bottom lines will then converge.

Jul 01 06:26 AM

[Value Inter...:]

Question. How much of the 2009 and 2010 budget are capital investments in the financial sector such as TARP, or GM as opposed to routine spending? It seems to me that much of the deficit in 2009 at least is comprised of the TARP.

Jul 01 11:00 AM

[awake09:]

Obama's cultists are on a mission to level the world's playing field by destroying our greatness. They are mindful of the deficit scenario, and are accepting the inevitable collapse. Do you hear one single cry of concern from that side of the isle? I often write to CA Senator Feinstein, only to get replies rhapsodizing on how the nation is finally going to get all the big DC programs they have been waiting for, since we 'voted for change' in 2008. Can she be that dense? No, she isn't-- it's their plan.

We are dealing with psychopathic people here, and the sooner we realize we're in a war from within, the better. Otherwise we will lose, the enemy wins, and he's NOT nice.

Jul 01 01:44 PM

[Gregman2:]

When will federal employees be asked to share in the hardship of this recession? It's pretty clear that their benefits and pensions are largely responsible for the bloat. (Their pay-outs are not linked to revenues in any way, and this has been going on since the end of WWII).

Jul 01 06:35 PM

[perceptions...:]

How long to convergence?

And Then?


On Jul 01 06:26 AM User 353732 wrote:

> Given the analysis you present a reasonable conclusion is that:<br/>1.
> Four things will increase: taxes, inflation, government repression
> of free markets and free speech and and class warfare
> 2. Four things will decrease: size of the middle class, value of
> the dollar, quality of life(for 90% of Americans) and US geo-strategic
> stature
> The top and bottom lines will then converge.

Jul 01 08:41 PM

[437339:]

Re

Government pentions + expensive healthcare need to stop NOW at fed + state , county levels . Add to the defeceit the SURGE in the middle east Happening now . WHO is going to pay for this ?

Jul 01 10:59 PM

[mr freddo:]

We really need some "out of the box" thinking on these federal deficits.

First, Marijuana should be legalized and taxed. This is a $100 billion market nationally. We waste billions trying to enforce the law as well. Done properly, the government could clear $80 billion.

Second, increase federal taxes on cigarettes from 1$ per pack to $4 per pack, to generate $3 x 22 billion packs per year or $66 billion. Let's call it $50 billion.

We eat 66 pounds of beef per person in the USA per year. A tax of 2$ per pound of beef would provide $40 billion of revenue.

A 2$ tax on a gallon of gasoline would provide great incentive for alternative fuels while providing $250 billion per year in revenue.

We have 150 million passenger cars on the road that are being replaced on a 7 to 8 year cycle for an average of about 18 to 20 million cars per year purchased. Put a tax on all non hybrid/electric/altern... cars sold. $3000 on 15 million cars is $45 billion.

At 10 pints of spirits per person, we could generate $10 billion with a $3 tax per pint.

Firearms tax. 5 million guns x $3,000 per gun would generate
$15 billion.

While we have generated new revenues of $500 billion, we have also gone a long way to reduce the expenses of the health care system that are a result of smoking, eating red meat, living near guns, and drinking alcohol. Take these new taxes and fund medicare and social security. Increase the age for eligibility, require a significant co-pay on all medicare services.

Medicare is budgeted for $750 billion next year.

This plan doesn't get us all the way there but it is a start.

It's not the end of the world.

Jul 01 11:21 PM

[optionsgirl:]

Mr. Freddo: Congrats on your idea of legalizing mj.
I'd love to see the IRS disbanded and a flat tax on consumption. That way all Americans would be taxed fairly. We wouldn't need an army of thieves and thugs strong-arming the populace.
As for your other ideas, it would all be taken care of if health insurance became the responsibility of every citizen, rather than the fed govt, state govts, and business. If health insurance wasn't tied to business, you'd be amazed how new efficient products would be developed. Those who choose to maintain a healthy lifestyle would be rewarded in discounts in the insurance rates, while those who promote an unhealthy lifestyle would pay for their habits, themselves.
Personally, I think your ideas to add more sin taxes is dreadful.

Jul 02 08:56 AM

[modern prag...:]

Mr. Freddo;
It is an abomination the our government uses tax policy to manipulate individual behavior. Our Government was set up to protect the individuals rights not manipulate behavior. Most people forget the government is suppost to represent all of us and not a select micro group who want to tell the rest of us how to live. I know the last thing that my neighbors or I want is to tell each other what we can eat, smoke or drink.

For people like you I would ask, how much is enough government. Because no matter how much our wonderful government collects in taxes it never seems to be enough.

It is trully sad that unless things change, us working stiffs of the world will end up getting stuck with the bill and dispite the fact we are paying that bill we will have no say in how we live our lives.

Jul 02 09:43 AM

[mr freddo:]

Modern Prag

I agree with you in principal, I don't like the government any more than you do. But here in the real world we are stuck with it for the time being.

My tax ideas allow you to continue with your behavior, you just have to pay the real cost to society. Go ahead and smoke cigarettes, but don't burden society with your increased health costs. The same goes for alcohol, firearms, red meat, car exhaust, foreign wars due to gasoline, and marijuana.

Options Girl:

I like the discounts idea which is another way of taxing fat people.

Thanks for responding. I have taken a pragmatic approach to solving our problems rather than spout ideological rhetoric as is happening in California right now. Your read the article. Basically, we are screwed if we don't get moving and do something about the deficits now and into the future.

My comment was meant to get us all thinking outside the box. I chose the revenue side of the equation, the cost side has great potential as well.

Jul 02 11:01 AM

[modern prag...:]

Mr Freddo

In this real world unless we stop our government from taking away our rights we won't have any choices to make.

But then we could all live in utopia singing Kum by ya!

Jul 02 05:05 PM

[Northstar10000:]

Tax the hell out of the poor. Watch them move up a few notches in the income tax bracket. Free riders, start paying up.

Jul 02 11:04 PM