We all know that Uncle Sam is drowning in red ink–if you need a humorous reminder check out Remy’s “Raise the Debt Ceiling.” Well, it turns out that states are not in much better shape. According to a new study by Harvard Economist Jeffrey Miron, for the Mercatus Center, states will reach dangerous debt levels in 20 to 30 years. From the study “The Fiscal Health of the U.S. States” (pdf):
This paper examines the fiscal health of the 50 U.S. states and reaches five conclusions. First, state government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound. Second, the key driver of increasing state and local expenditures is heath-care costs, especially Medicaid and subsidies for health-insurance exchanges under the Patient Protection and Affordable Care Act of 2009. Third, states have large implicit debts for unfunded pension liabilities, making their net debt positions substantially worse than official debt statistics indicate. Fourth, if spending trends continue and tax revenues remain near their historical levels relative to output, most states will reach dangerous ratios of debt to GDP within 20 to 30 years. Fifth, states differ in their degrees of fiscal imbalance, but the overriding fact is that all states face fiscal meltdown in the foreseeable future.
Check out this video to see when your state reaches the danger zone.
I have long been a fan of Nouriel Roubini, but some recent comments of his made from Leen’s Lodge in Grand Lake Stream, Maine has me reconsidering my fan-hood. (Note: Due to conflicts, I was unable to attend this year’s event where, one year ago, the idea for this blog blossomed).
Of course, that is an empirical question, so let’s now turn to the data to see where the source of the deficit is coming from–lack of revenue or run-away spending. The charts below are all created from the data from the Congressional Budget Office.
Chart 1 shows federal outlays and revenue from Fiscal Year (FY) 2007 to 2021. The chart basically shows that we are being lied to in the sense that the so-called stimulus package, which by definition are supposed to be temporary, is in fact a permanent increase in federal spending (red line). Between FY 2008 and 2009, federal spending jumped by $535 billion, but never does it decline by the same amount.
To look at it another way, in FY 2007 federal spending represented 19.6 percent of Gross Domestic Product (GDP). In FY 2009, federal spending jumped to 25 percent of GDP. One would expect that over the next 10+ years that the share of federal spending would fall by back to around 20 percent. You’d be wrong. Federal spending will hit a low of 23 percent of GDP in 2014 and then CLIMB up to 24 percent by 2021.
In contrast, the green line shows federal spending if spending were fixed at pre-recession, FY 2007 levels (19.6 percent of GDP). The gap between the green and red lines represents the permanent increase in spending–some from the stimulus, some from Obamacare some from who-knows-where. The blue shows federal revenue in which I assume that Bush tax cuts will be made permanent (this is to better show that the deficit is due to spending and is not attributable to the Bush tax cuts).
Chart 2 zooms in on just the difference between federal revenue and federal outlays, i.e., the budget deficit. There are a couple of interesting things that pop-out of this chart.
First, even with federal spending held at 19.6 percent of GDP (green line), there still would have been a strong stimulative environment from the federal government due to the revenue drop-off due from the recession and, to a lesser extent, the Bush Tax Cut extension. The spending stimulus package was an add-on (red line) to the natural stimulus that automatically occurs when revenue drops but spending stays the same. So the real question was not whether or not we needed a spending stimulus (we get one anyways), but whether or not we needed additional spending stimulus.
Second, holding federal spending at 19.6 percent would also create an automatic path toward reducing the federal deficit. As shown in Chart 2, by FY 2021, the federal deficit is not only nearly back to zero, but would already be at a sustainable rate (relative to GDP growth) by FY 2014-ish. In contrast, the current projection of federal spending shows that the federal deficit will actually be growing in FY 2021! Overall, between FY 2011 and FY 2021, the current path will create another $11.8 trillion in debt (nearly doubling our current debt load) whereas spending at 19.6 percent of GDP would create only 1/3 of that debt ($3.5 trillion)–again, assuming Bush Tax Cuts are extended.
So, Nouriel Roubini is flat wrong . . . federal spending is THE problem and only CUTS to federal spending will solve this deficit/debt crisis. Tax increases will only hamper the ability of the economy to recover and worsen our fiscal condition in the long-run. But, wait a minute, this is similar to what was proposed by the Cut, Cap and Balance folks. Although even that plan wasn’t enough since they only cut federal spending down to 19.9 percent of GDP and take until FY 2018 to phase-in to that level. What a bunch of big-spending liberals . . .
Hochul’s victory gave a lift to Democrats still reeling from an electoral drubbing last November that cost the party control of the House. It also bolstered their resolve to push back on GOP efforts to cut Medicare and other entitlements — efforts that have drawn support among some tea party members but are widely opposed by independent voters.
“The three reasons a Democrat was elected to Congress in the district were Medicare, Medicare and Medicare,” Democratic Congressional Campaign Committee Chairman Steve Israel, D-N.Y., said in an interview . . .
Hochul said she would work to balance the federal budget but refused to “decimate” Medicare . . .
Her supporters at a union hall in Amherst, outside Buffalo, chanted “Medicare! Medicare!”
If the average historical level of tax revenue is extended, spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security will consume all revenues by 2049. Because entitlement spending is funded on autopilot, no revenue will be left to pay for other government spending, including constitutional functions such as defense.
If this election becomes a national trend, then folks under the age 40 may be staring a form of indentured servitude right in the face–lets call it “entitlement slavery” . . . brought to you by the ballot box because there are simply more voters over 40 (who also have a higher voter turnout rate) than those under 40.
The chart below shows the private sector share of personal income from January 1959 to December 2010. The private sector grew again by another 0.08 percentage points and has now grown for 4 consecutive months adding a total of 0.31 percentage points. Interestingly, the revisions to recent months have downshifted the growth in the private sector.
Now that the Bush tax cuts extensions are now law, will the private sector be able to continue its growth against another round of government spending? All of the new spending contained in the bill will show up in personal current transfer receipts, thus accelerating the growth in government spending. As long as the private continues to grow as it has, I think the new spending will cause the private sector to plateau for awhile but not retreat. Of course, in the long-run, I think the opposite is true with the downward trend in the private sector continuing.
Note: “Supplements to Wages and Salaries” (benefits) in the BEA data are not broken down into “private” sector” versus “government” components. I used the ratio of private wages and salaries to total wages and salaries in order to disaggregate supplements.
