Our resident Penguatroll took me to task for what he thinks is an exaggeration made by Eric S. Raymond.  Because I noted that I agree with Raymond (though the phrasing was a bit uglier than I am normally used to), I figured I should defend the case.

Here is the crux of the problem:  for two generations, people were able to demand more and more from the state and federal governments.  In the 1950s and 1960s, we had huge growth and a population boom.  In the 1970s and 1980s, we had the influx of many more productive workers.  Well, those folks are retiring.  True baby boomers (born right after 1945) have started to collect Social Security and Medicare, and population dynamics have flipped around.  We have a large percentage of Americans who are getting old, who grew up paying into these systems under the assumption that they would be around for them.  Honestly, these people were snookered by governments.

Check out USA Inc. It’s an analysis of the federal government as though it were a private business.  Don’t worry, there are plenty of pictures and graphs and charts.  If you just want the highlights, look at John Hinderaker’s summary over at Power Line.  Our short-term prognosis has blown up:  entitlements (on slide 149) have increased by a factor of nearly 11 between 1965 and 2009, whereas real GDP increased by a factor of roughly 2.7 over that time period.  And I’m not even sure that’s a fair comparison—it does mark the start of the Great Society programs, but Social Security started earlier.  Cash flow has been negative for 9 years (a cumulative $4.8 trillion deficit), the balance sheet is negative, and most importantly, government accounting leaves major, huge, massive unfunded liabilities…and this before Obamacare even begins.

Total federal debts, if you include the unfunded liabilities, run at roughly $82.5 trillion.  That is roughly 6 years of GDP, so people would need to work more than 6 years, paying every dime to the government, before we’re square.  And again, that’s before Obamacare pushes that number up further.  Federal debt on the books is inching up toward 100% of GDP, also known as the amount of debt the United States government held at the end of World War II and is threatening to blow right past that rate.  And unlike that war, there isn’t a huge military dismantlement on the horizon.  Even if you got rid of the military altogether (which wouldn’t happen, and would be idiotic), that’s chump change compared to the entitlement expenses.  In Paul Ryan’s presentation (which I linked to the other day), he notes that defense spending was $692 billion in SFY2010.  Entitlement spending was $1.9 trillion according to USA Inc (slide 55; this differs a little bit from Ryan’s presentation due to the way they account for the different line items, I gather, but add up the mandatory entitlement spending and you get roughly the same figure).  And remember:  that’s before the giant entitlement wave hits.  Also remember that defense spending as a share of GDP is significantly lower than it was in the 1960s and still below the long-term trend (slide 65).  The problem here is entitlements.

So we’re talking 6 years of everybody working full-time, or more like 20 years (slide 26)…if no more debt is taken on.  That isn’t likely.  And consider that Social Security is the best-off entitlement program.  This is the same Social Security which is already running deficits and is backed by IOUs for money Congress spent decades ago.  This is the same Social Security program which is expected to go into a permanent negative cash flow by 2015 (slide 140).  The only thing Social Security has going for it is that Medicare and Medicaid have blown way past the point of no return.

Also note that interest rates have been held down for so long.  If they happen to rise, debt levels will soak up quite a bit more in terms of percent of total federal revenue (slide 167).  They estimate that if US 30-year average yields return to the 1980-2010 trend, we would be looking at jumping from about 7-8% of federal revenues going to paying off interest on outstanding debt to 15%.  By 2025, they estimate that entitlement spending and interest payments will exceed federal revenues (slide 174).  This is roughly 35 years earlier than a similar projection in 1999 by the Congressional Budget Office (175), so things have gotten considerably worse.  Federal revenues could go up some (higher taxes), but there are limits built into the American system which prevent them doubling.

So now that I’ve depressed our readers, let me go to the next level.  All of these problems are on the federal level.  States have the same thing going on.  I have a post about Veronique de Rugy talking about some of these problems in various states.  We’ve heard about the things going on in Wisconsin and New Jersey, but those aren’t the only states in trouble.  Ohio had an $8 billion deficit for this upcoming biennium.  The Governor’s proposal is to reduce state spending 5.3% in spending for SFY 2012 and hold it below the rate of growth in SFY 2013 (page 11).  But that doesn’t get Ohio out of longer-term structural problems.  Other states have structural problems well and it seems they’re counting on the feds to bail them out, like with ARRA but on a bigger scale.  That’s not coming.

Now, there are mitigating factors here.  Given that Europe and Japan have bigger structural problems (to the point where there are rumors that Spain, Portugal, and Greece may soon start having problems even borrowing), the US will still act as a safe harbor (like they are right now, as a result of the earthquake in Japan).  The irony here is that this could help a sober federal government but will harm states:  states have a lot of money tied up in Treasury notes, and they’re looking for an 8% rate of return.  If yields remain down in the 1-2% range, that helps the federal problem but harms the states.  Unfortunately, this is the same government which got us into our mess.  And that is why I agree with Raymond.

What would this mean?  The end of the welfare state.  The federal government will spend so much money paying off debt that they won’t have enough to continue the Ponzi scheme.  Again, institutional factors will prevent revenues from going up too much higher than 20% and with debt threatening to cover all federal revenues, there won’t be much left for transfer programs.  I don’t see the federal government surviving without a substantial renegotiation of Medicare, Medicaid, and Social Security.  And that is what Raymond is talking about—it’s not a Mad Max world; it’s a pre-welfare state world (so, say, 1790 until the early 1930s).  The unfortunate thing is that the government drag would still be much higher than it was during most of that period, as they would still need to take a large percentage of taxpayer funds to cover outstanding debt payments (as a default, though technically possible, would be a miserable result), and we have generations of people who can’t imagine life without government as mommy and daddy, but then the positive thing is that hey, maybe people will get off their addiction to other peoples’ money and real growth rates would go back up again.

Wait, there’s the optimist in me coming back out again—gotta fight that back…

3 thoughts on “Entitlement Problems

  1. I think your post is a lot more reasonable than the other one was, and it makes perfect sense. I fully agree that the entitlement problems have gotten out of hand.

    I say we do the Soviet strategy: tell everyone we aren’t paying our debts and try to make us. It worked for Lenin in 1917 (it’s largely why the Soviets were insulated from the Great Depression) and it could work for us now.

    1. That’s also why the average Soviet citizen was significantly poorer than the average imperial Russian citizen.

      Defaulting on debts works for Crapstanistan (which, frankly, Russia was in 1917) because autocrats and direct toadies can rustle up the hard currency, so they don’t get hit too hard. It doesn’t work for open democracies, however. And for the government of the largest economy of the world to default would be an economic catastrophe.

      Actually, if the rest of the world weren’t in worse condition (most European nations have worse entitlement problems, the Japanese citizenry is the first old nation, and there’s a real likelihood that China will get old before they get rich), this might be a good way of a shrewd and slightly-insane American president to get some “foreign aid” back to avoid global economic catastrophe as part of a “debt reduction program.” It’d kind of be like the IMF in reverse.

      I believe you think my post is more reasonable simply because the comments on ESR’s post assumed that he was talking “whole world’s going to collapse and we’re living in sheds eating cans of beans.” He wasn’t. I think that if he read what I wrote, he would agree that we’re saying the same thing.

      1. I’m not sure I agree with your first statement — it depends on what you mean by “citizen.” Remember, even at the very end of the Russian Empire, the majority of the population were peasants who could barely subsist on the land they were given. Post-WWII, there is evidence that the economic situation of the average Soviet was superior to that of the average Imperial Russian. Rather than get in to too many arguments on this, I recommend you take a look at Paul R. Gregory’s Before Command . However, up until about 1937, you’re right on the money with that.

        As for the rest, you may be right.

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