Debt Deficits [Read-Only] - Montana State University · Definitions • Deficit = Expenditure –...
Transcript of Debt Deficits [Read-Only] - Montana State University · Definitions • Deficit = Expenditure –...
Debt and Deficits
Douglas J. YoungProfessor Emeritus
Montana State UniversityJanuary, 2011
Debt and Deficits
1. How Big is the Federal Government Debt? The Deficit?
2. How Much is “Too Much?”3. The Long Term Outlook 4. What Can be Done
Definitions• Deficit = Expenditure – Revenue
– Usually, per year– “The Federal Government’s deficit in
2010 was approximately $1.4 trillion.”• Debt = Accumulation of prior deficits
less surpluses – At a point in time, e.g. end of year– “The Federal Government’s Debt on
September 30, 2010 was $13.6 trillion.”
Federal Deficits 1939-2011
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Perc
ent o
f GD
P
ERP 2010 and earlier, Tbl B-78
Federal Receipts and Outlays
10%
15%
20%
25%
30%
1970 1975 1980 1985 1990 1995 2000 2005 2010
Perc
ento
fGD
P
Receipts Outlays
ERP, 2010
The Debt – How Big is It?• Federal Government Debt =
$13.6 Trillion, or $44,000 per person• Non-Financial Corporate Business
– Debt = $13.6 Trillion– Assets = $26.2 Trillion
• Household + Nonprofit Sector– Debt = $13.9 Trillion– Assets = $68.8 Trillion
http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf
Ownership of Federal DebtBillions of Dollars – September 30, 2010
Total $13,586 100%
Agencies and Trusts $4,534 33%
Federal Reserve $965 7%
Domestic $3,887 29%
Foreign $4,200 31%US Treasury http://www.fms.treas.gov/bulletin/b2010_4fd.doc
Federal Debt in the Long Run
Federal Government Debt
Taylor, “Getting Back on Track,” St. Louis Review, May-June, 2010
Per
cent
of G
DP
Gross Federal Debt
0%
20%
40%
60%
80%
100%
120%
140%
1940 1950 1960 1970 1980 1990 2000 2010
Perc
ento
fGD
P
ERP 2010 and earlier, Table B-78
Federal Debt
0%
20%
40%
60%
80%
100%
120%
140%
1940 1950 1960 1970 1980 1990 2000 2010
Perc
ento
fGD
P
ERP 2010 and earlier, Table B-78
Gross
Held by Public
How Much Debt is “Too Much?”
• When lenders worry that the country won’t be willing and/or able to pay it back =>
• Interest rates rise (dramatically) to compensate lenders for:– Default Risk and/or– Inflation Risk
When Lenders Lose Faith …
Publicly Held Debt
0
20
40
60
80
100
120
140
1997 1999 2001 2003 2005 2007 2009
Perc
ent o
f GD
P
GreeceItalyBelgiumPortugalUSASpainIrelandGermany
OECD
Would you loan Ireland money?
The Exchange Rate Effect
• If lenders distrust a country’s debt …– Sell their bonds (as we have said)– More generally, sell assets denominated
in that currency in favor of others, because the whole economy is likely to be affected
– That is, sell that country’s currency
Thailand: 1998
Malaysia: 1998
Korea: 1998
Argentina: 2002
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20Ja
n-00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
$US
per P
eso
The Effect on the Euro• Not happening (much) in Europe,
because – Greece, Ireland, Spain, Portugal are a
small part of the Euro– “Rescue” package from European
Central Bank– Can sell Irish bonds and buy German
bonds
Could a Run on the Dollar Occur?
• Yes, the US Dollar is the mostly widely held currency in the world
• But, China and other holders of US dollar-denominated assets would be harmed – As the dollar fell– If economic collapse ensued
• No evidence to suggest it (so far)
The US Dollar is Stable (so far)
As of January, 2011 …
• The US Government Debt is NOT “Too Much” in the sense that it threatens the economic and financial system
• But Neither Debt nor Deficits, as Conventionally Measured, Include “Promises” Made to Future Generations
The Long Term Outlook
National Commission on Fiscal Responsibility and Reform
http://www.fiscalcommission.gov/
• Not necessarily THE ANSWER• Good discussion of the issues• You decide what to do
Debt Scenarios
December Tax Deal
Flat Revenues; Growing Spending
What Can be Done?
• Cut Spending (from what it would otherwise be)– Health Care– Social Security– Other (Discretionary) Spending
• Raise Revenues– Tax Reform
Deficits with and without Reform
What the Commission recommends
• Do not implement the 23% cut in physician payments in current law
• But Freeze physician payments from 2012 to 2020
• Direct the CMS to “develop an improved physician payment formula that encourages care coordination … and pays based on quality … not quantity”
Recommendations - 2
• Reduce Fraud• Malpractice (Legal) Reform • Require minimum deductibles and
cost-sharing in Medicare supplements • 3.6 Establish a long-term global
budget for total health care spending and limit the growth to GDP + 1%
Social Security
Social Security
• Make the benefit formula more “progressive,” ie reduce benefits for high-earners and increase them for the lowest earners, those older than 85, and long-term disability recipients
Social Security - 2• Gradually increase early and full
retirement ages by 2 years based on increases in life expectancy– Hardship exemption at age 62
• Increase taxable earnings to cover 90% (versus 86% today)
• Use the “chained” CPI for inflation• Cover all new S&L workers
“Discretionary” Spending
• Includes defense, education, courts, unemployment, agriculture, spending on Congress and the Executive Branch, etc.
• Does not include “formula” programs like health spending, social security or legal obligations like interest
Discretionary Spending - 2
• Enact “tough” spending caps with “real teeth” to bind Congress
• Make significant cuts in both security and non-security spending
• Cut agriculture spending• Reform civil service and military
retirement• Pay freeze (including Congress!)
Tax Reform(Doug’s translation in italics)
• Lower tax rates and broaden base (Eliminate or limit deductions)
• Reduce the deficit (Raise taxes)• Increase progressivity (Raise taxes
on the rich)• Make America the best place to start
a business and create jobs (Cut the corporate tax rate)
Individual Income Tax - 1
• Reduce the top personal rate from 35% to 23-29%
• Increase taxes $80 billion in 2015 and $180 billion in 2020
• Repeal the AMT and phase out of deductions and exemptions
Individual Income Tax - 2
• Tax capital gains & dividends as ordinary income
• Eliminate itemized deductions (!)• 12% tax credit for mortgage interest
on principal residence (capped)• 12% tax credit on charitable
donations > 2% of AGI
Individual Income Tax - 3
• Cap exclusion of employer-provided health insurance
• Tax interest on new S&L bonds• Cap exclusion for contributions to
retirement accounts at $20,000 or 20% of income
• Eliminate 150 other tax expenditures
Corporate Tax
• Lower top rate from 35% to 23-29%• Eliminate subsidies for particular
businesses (Drilling expenses. Ethanol? Green energy?)
• Change taxation of foreign source income
Summary• The US government debt is not now
at dangerous levels• However, a continuation of current
policies for 25 years would be problematic at best
• The Deficit Commission laid out a (mostly) coherent solution
• Does the political will exist?
Questions?
This presentation is available at:http://www.montana.edu/djyoung
Click on “Papers”
Then “Debt and Deficits”Under “Other”