Fat-Free Econ 26: US Public Debt and the November Elections

* This is my article today in TV5's news portal,

http://www.interaksyon.com/business/45173/fat-free-economics-us-public-debt-and-the-november-elections
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Whoever wins in the US Presidential elections next month will govern the biggest economy in the world, which also has the largest public debt worldwide. In fact, the US public debt is larger than its gross domestic product.

At the start of the current fiscal year, October 01, 2012, the US public debt stood at $16.159 trillion, composed of (a) debt held by the public at $11.311 trillion, and (b) intra-governmental holdings at $4.848 trillion. A day after, the total moved up to $16.171 trillion or an increase of $12 billion in just one day. For a good debt clock of the US to watch that is moving every minute and every second, just refresh this link.

And here is the growth of such debt through the years.

While the US government holds the 1^st place worldwide in absolute amount of public debt, the Japanese government holds the 1^st place worldwide in terms of the ratio of public debt to GDP, followed by Greece and Portugal in 2^nd and 3^rd places.

What explains the huge spike in US public debt and spending, especially in recent years? Or where can the next administration possibly make some spending cuts in order to minimize the fiscal bleeding and reduce the need for endless borrowings?

Source: http://s.wsj.net/public/resources/images/RV-AI016A_ENTIT_G_20120831013902.jpg

The welfarist and collectivist philosophy prevents or opposes cutting such spending. The advocates of this philosophy argue that the main function of government is to redistribute income, to confiscate more money from the haves and give it to the “have nots” or “have little” through a thick layer of bureaucracy at the national and local government levels that act as middlemen between these supposedly contradicting camps.

There is a twist somewhere here. As the need for more taxes by the US government rises, the number of people who do not pay federal income tax also rises. And this contributes to a pernicious situation where expenditures keep rising while tax revenues do not follow in step.

Source: The Economist, September 18^th 2012,http://www.economist.com/blogs/graphicdetail/2012/09/daily-chart-9

The appropriate solution to reduce revenues would have been to reduce spending. Ordinary households do that. When the income is low, they cut on spending and minimize borrowings whenever possible. Most governments - the US and the Philippines among them - do the reverse. As the funding gap between expenditures and revenues rises, they keep borrowing to maintain high expenditures as if the public debt burden can be solved by Batman or other fictitious characters.

The biggest challenge for the next President of the US is how to reduce public debt and government spending without compromising the productive capacity of the citizens, the entrepreneurs and ordinary workers, who will ultimately pay off those mountains of debt that have been accumulated through decades of fiscal irresponsibility by various administrations.

And the public – in the US, Europe, the Philippines and elsewhere – have to reconsider the welfarist and forced collectivism philosophy.  There is ample room to manage or allow society to run on more personal, parental and civil society responsibility, and less on government responsibility.
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Here is the additional chart and table that were not included due to space constraints:

a. Growth of US public debt through the years:

Source:  http://www.zerohedge.com/news/2012-10-02/usa-kicks-fiscal-2013-bang-and-93-billion-jump-debt-1615948701330035

b. Top debtors, OECD member countries.

I marked in red huge jumps in the ratio, moving up by 10 percentage points or more in just one year. Except Ireland and Iceland, those huge spikes in public indebtedness among the industrialized countries occurred in 2009 and 2010, with hang over until 2011.

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See also:
Fat-Free Econ 22: Three Years of Drug Price Control Policy, August 30, 2012
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012
Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012
Fat Free Econ 25: Property Rights and the Cybercrime Prevention Law, October 01, 2012

Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012
Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2012

Fiscal irresponsibility 11: US debt default talks

(This is my article yesterday in thelobbyist.biz with original title, Fiscal irresponsibility and debt default)

The term “debt default” suddenly has become a common term in public discourse in the US. The biggest economy in the world, the strongest military power in the world, and among the beacons of the “rule of law” in the world, is entertaining the idea of violating the rule of law, by defaulting on its huge public debt payment. What happened?

It is actually common sense and will not take a degree in astrophysics or financial economics to understand that living beyond one’s means will bring someone to big trouble someday. By spending larger than one’s income or revenue, regularly and consistently, then one’s debt will simply pile up year after year. And that is what has happened to the US and so many other countries in the world now, rich and poor alike.

I will limit my words and show these charts and a table below to speak for themselves. These will help readers make their own conclusions too.

source: The Economist, Buy now, pay later, April 13th 2011 issue.

The US’ budget deficit (expenditures larger than revenues) from 2010 to 2012 is projected to average around 9 percent of GDP. This is a very high figure. The ballpark “sustainable” level is 3 percent of GDP or lower. I discussed this chart earlier in ATR and the soul of limited government.

Fiscal irresponsibility, of public spending larger than taxes and other revenues, has been around since the 70s or earlier. There was a short period of fiscal surplus in the last decade (mainly during Pres. Bill Clinton’s term) but were erased immediately. Source of this chart and below is The Economist, I just forgot to note the issue date.

While the US war in Afghanistan, Iraq and elsewhere, then the huge corporate bail-outs in 2009-2010 have contributed a large part for the big jump in public spending in recent years, it will be the expensive welfare and entitlement programs plus high interest payment that will tear down the American taxpayers’ and government’s pockets in the coming years and decades.

Recently, it was Ireland and Greece that experienced deep fiscal crisis. Soon, Portugal, Spain, Italy, UK and other European countries, and the US, will follow suit. Note the 14 countries above which have gross debt of 77 percent of GDP or higher in 2010.

The US, or any other highly indebted economies around the world, should NOT default on their debt payment. The current high debt payment is penalty for past wastes and excesses. It should be a painful reminder that fiscal irresponsibility is wrong.

What the US and other highly indebted countries should DO, is to cut spending, from the size of their bureaucracy to military spending to expensive entitlements to foreign aid. If revenues are not sufficient to cover whatever bleeding heart programs, then that’s it. Governments should learn to live within their means.
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Five years ago, I wrote this:

How Bloated is the US Government?

MAY 08, 2006

The US has the largest economy in the world.
But it also is the most indebted country in the world.
And it has the biggest government spending, the biggest bureaucracy, in the world.
Just how big are the spending, and the taxes and borrowings to keep those huge expenditures?

Lucky that I checked the Mackinac website, and I saw Mr. Mark Brandly's article, "How big is Bush' big government?". For brevity purposes, I removed certain paragraphs; if interested to see the whole paper, please see http://www.mackinac.org/article.aspx?ID=7689

Below are the relevant numbers from Mr. Brandly's paper:

* Federal spending alone in fiscal year 2006 is expected to be over $2.7 trillion, which means the federal government spends $7.4 billion a day or $5.1 million in every minute of the year. This is 815 times the level of federal spending in 1930.

* This $2.7 trillion in federal spending breaks down to $9,000 per capita or more than $36,000 for the average family of four. If we add in all state and local spending, then total government depredations (a term Murray Rothbard used to describe the greater of government spending and government receipts) are currently over $4.4 trillion or about $14,700 per person annually.
* A significant portion of this spending is being financed with government borrowing. In 1930, the per capita debt load was $140 per person. The current federal total debt level is $8.4 trillion, which works out to around $28,000 per person. In short, the per capita debt load is 200 times larger than it was in 1930. Adjusting for inflation, the real debt per capita is still over 16 times more than it was in 1930.

* Federal government debt increased $553 billion in fiscal year 2005 alone. That's more than $1.5 billion of additional debt per day and over $1 million of borrowing per minute for every minute of the year. The interest on the debt in 2005 was $352 billion or more than $1,100 for every man, woman and child in the country. These interest payments are roughly equal to 37 percent of federal income tax revenues.

* Much of this debt is owed to the Federal Reserve. U.S. taxpayers are on the hook for $758 billion of government securities that are held by the Fed. So, on average, every person in the country owes the Fed about $2,500.

* One way to see the harm of government intervention is to realize its effects on our standard of living. The depredations of the state reduce the incentives to be productive, destroy our capital base and have a negative effect on economic growth. From 1959 to 2005, adjusting the numbers using the implicit price deflator, real Gross Domestic Product increased an average of 3.37 percent annually.

* Consider the possibility that government interventions reduced real economic growth 1 percent annually during this time. If there had been an additional 1 percent per year economic growth since 1959, then real GDP would currently be 55 percent higher than it is. The 2005 GDP of $12.5 billion would have been $19.3 billion. The median family income is estimated to be $44,389. A proportionate increase in this statistic results in a median income of $68,800.

* In this scenario, a worker with a salary of $44,389 who is losing 35 percent of his salary to taxes has a tax liability of $15,536. After paying the various types of taxes he gets to keep only $28,853 of his salary. With the extra 1 percent growth per year since 1959, if that worker represented the average, his gross salary would be $68,800 and he would get to keep all of it.

* It is conceivable that the $4.4 trillion of annual depredations could have caused more than 1 percent annual damage to our economic growth since 1959. What are the implications of a 2 percent negative impact on GDP? If the absence of interventions had added an additional 2 percent annual growth, this would have resulted in 141 percent more output today. The 2005 GDP would have been over $30 trillion and the median family income would now be $107,000. The worker described above with the $44,389 gross salary and the $28,850 of after tax pay, would have an income of $107,000. The depredations have reduced his net income by 73 percent.

* Those of us making the case for liberty have logic, history and morality on our side. Government intervention is immoral and should be stopped for that reason alone. However, the economic costs of the intervention are also important. Part of the appeal of freedom is that it leads to tremendously higher standards of living and these numbers show that government interventions that cause seemingly small amounts of harm, over time, impoverish a society.
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See also:
Part 10, Rich countries' public debt, April 27, 2011
Part 9, ATR and the soul of limited government, April 26, 2011

Migration and Freedom 8: Denmark's immigration policy

A Filipino friend working in Denmark posted in his fb wall a news report from Politiken.dk, Affirmative action for some foreigners. Portion of the report says,

“The government and Danish People’s Party believe that it should be easier to come here if you have a good education and a lot of money. But this is about Danish citizens who fall in love. So now it’s better to fall in love with an American than a Brazilian,” says Social Democratic Integration Spokesman Henrik Damm Kristensen.

The Marriage Without Borders organisation says it is ‘ridiculous’ to suggest that it is easier to integrate Americans than other nationalities.

Then my Filipino friend added his own comments and observations about Denmark's immigration policy:

Denmark's welfare and social policies remain one of the most humane in the world, but its immigration policy so inhumane. Even the UN concurs. Imagine, there's a government literally telling its people who to marry, who to partner or live with. There's really something rotten in the state of Denmark.

US Debt 10: Entitlement Spending and Fiscal Irresponsibility

Aside from huge spending on the wars in Iraq and Afghanistan, other military expenditures, the US government is spending a lot on various health and entitlement (welfare) programs, foremost of which are Medicare, MedicAid and Social Security.

Here is a good chart from The elephant in the room, The Economist, March 7th 2011.


The US government's budget deficit the past 2 years have been at around $1 trillion a year, federal government alone, excluding budget deficit of many other states, cities and counties.

By continuously living beyond their means, by continuing with the expensive welfare system even if revenues are no longer there, the US government and many of its citizens are digging further themselves into heavy indebtedness.

By brushing away personal responsibility aspect of healthcare and many other aspects of the people's lives, by insisting on more government responsibility of a nanny state, huge fiscal and financial troubles are being built up in the future.

Meanwhile, here's what I wrote last February 15, 2011:

On US fiscal irresponsibility

February 15, 2010

The BIG US government, whether headed by a Democrat or Republican administration (except perhaps during Ronald Reagan's term), just keeps piling up the public debt. The spend and spend, tax and tax, borrow and borrow policy was pursued without let up until today, until the next few years, and possibly even the next few decades.

President Obama said that this year, the US public debt will rise by $2 trillion in just one year! Here's the report from the Washington Times yesterday, Debt now equals total U.S. economy. Picture of Mr. Obama and White House Budget Director Jacob Lew is also from the same news report.

By Stephen Dinan

The Washington Times

12:16 p.m., Monday, February 14, 2011

President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years’ time.

Amid the other staggering numbers in the budget Mr. Obama sent to Congress on Monday, the debt stands out — both because Congress will need to vote to raise the debt limit later this year, and because the numbers are so large.

Mr. Obama‘s budget said 2011 will see the biggest one-year jump in debt in history, or nearly $2 trillion in a single year. And the administration says it will reach $15.476 trillion by Sept. 30, the end of the fiscal year, to reach 102.6 percent of gross domestic product (GDP) — the first time since World War II that dubious figure has been reached.

Please take note of two important facts.

1. This is federal debt only; not included here are public debt by the different states, cities and counties.

2. Also not included here are unfunded liabilities from various entitlement programs (Medicaid, Medicare, social security, etc.) which are much bigger, some estimates putting it at nearly $200 trillion in the next few years.

Here's another report from the NYT yesterday, Obama Budget Reflects a Cut-and-Invest Agenda

Annual deficits through fiscal year 2021 will add a combined $7.2 trillion to the federal debt, Mr. Obama’s budget indicates — after allowing for $1.1 trillion in deficit-reducing cuts in spending and increases in taxes over 10 years that the president proposes. After 2021, an aging population and rising medical costs will once again drive deficits to unsustainable heights unless there are further changes in spending and taxes, he acknowledges.

While the federal budget would total $3.7 trillion for 2012, much of that spending is accounted for by fast-growing programs — Medicare, Medicaid and Social Security — that are essentially on autopilot unless Mr. Obama and Congress change them, as both parties say they must. It also includes a big item that cannot be cut without reining in the overall deficit: interest on the mounting federal debt.

Fiscal irresponsibility, living beyond one's means, has one sure result: ever rising debt, which raises the annual interest payment, which reduces available fund for certain social and economic services, which necessitates more borrowings, which bloats the public debt further, and so on.

The solution to ever rising debt is an ever-rising cut in spending, period. Live within one's means, or suffer the economic distortion and malady of taxing your people more to pay an ever-rising debt and interest payment.

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