Tuesday, February 9, 2010

Quick Link: Learning from History

David Walker, U.S. Comptroller General from 1998 to 2008, wrote an interesting piece called What the Past Tells Us:
Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time.

How many people today could describe the fall of the great empires of the past, I wonder. Are we truly any different?
I love to read history books for the lessons they offer. After all, as the homily goes, if you don’t learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire – which included five hundred years as a republic – came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?

Think we'll last 500 years? I don't. At least not in any form our founding fathers would recognize.

Monday, February 8, 2010

Food for Thought: Total Debt to GDP Ratio

A previous post normalized government debt by GDP. If you add in private (consumer, corporate, etc) debt you get an even nastier picture:

Man, there is just nothing good you can say about a chart like that.

The fact that banks, foreign governments, and other "friendly" folks with savings are willing to continue to lend us more money when we're already in over our head should not be construed as evidence that we can actually handle the debt -- It only means that they feel we have sufficient (future) tax-levying power to pay interest on this debt (no principal, of course) for as long as it exists.

Plenty of homedebtors in the last 4-5 years found out that "qualifying" and getting a huge loan didn't mean they had the wherewithal to pay it back. They lost their downpayment and their house. What might we lose?

Quick Link: Government Deficits

RealClearMarkets - On Government Spending, America Has a Candor Gap
We have a massive candor gap, led by President Obama but also implicating most leaders of both parties. The annual budget necessarily involves a bewildering blizzard of numbers. But just a few figures capture the essence of our predicament.

First, from 2011 to 2020, the administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending. In 2020, the gap is $1 trillion, again approaching a fifth: Spending is $5.7 trillion, taxes $4.7 trillion. All amounts assume a full economic recovery; all projections may be optimistic. The message: There's a huge mismatch between Americans' desire for low taxes and high government services.

That last line sums it up: We want lots of government but aren't willing to pay for it.
Second, almost $20 trillion of the $45.8 trillion of spending involves three programs -- Social Security, Medicare (health insurance for those 65 and over) and Medicaid (health insurance for the poor -- two-thirds goes to the elderly and disabled). The message: The budget is mainly a vehicle for transferring income to retirees from workers, who pay most taxes. As more baby boomers retire in the 2020s, deficits would grow.

Third, there is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases. Suppose we decided to cover all future deficits by raising taxes. Taxes would rise in the 2020s by roughly 50 percent from the average 1970-2009 tax burden.

Clearly unsustainable...