[eklipse]

A nice summary of the situation (as per usual for The Economist); the question really boils down to whether politicians will make the necessary but extremely unpopular revisions that are needed to the economy in the US, or will they just sweep them under the rug and hope the crisis doesn't come during their term?

from: http://www.economist.com/world/na/di...ory_id=2189237

....

America's deficits, A flood of red ink
Nov 6th 2003 | WASHINGTON, DC
From The Economist print edition

America's fiscal position has deteriorated fast during George Bush's presidency. It will not be easy to reverse

LAST week's figures looked, at first, like vindication. The news that America's output grew at an extraordinary 7.2% annual rate between July and September, the fastest rate since 1984, was proof, said the White House, that the president's tax-cutting strategy was working. The economy was growing strongly, George Bush crowed, because “we left more money in the hands of the American people.”

Tax cuts are the central pillar of Mr Bush's economic strategy. He has chopped taxes in every year of his presidency, in all by as much as Ronald Reagan did in the early 1980s. His first tax package, signed into law in June 2001 and worth $1.35 trillion over ten years, was a campaign promise. It cut marginal income tax rates, gradually eliminated the estate tax and raised the child tax credit, ostensibly to make sure that the budget surplus was returned to Americans and not frittered away in Washington.

A year later, the emphasis was on stimulating the sluggish economy by giving firms tax incentives to invest. In May 2003 came another big tax plan, again sold as a stimulus, but designed mostly to shift the tax burden away from investment income by cutting taxes on dividends.

The buzz in Washington is that this tax-cut strategy will continue into election year. The White House is said to be working on a new tax package for 2004, focused on dramatically expanding tax-free retirement and savings accounts. Politically, the goal is to appeal to America's large, and growing, investor class. Economically, it would shift the tax burden yet further onto wage income. In time, most Americans' savings would be shielded from tax.

While Team Bush touts tax cuts, it never mentions the other hallmark of this administration's fiscal policy: soaring federal spending. For all his rhetoric about keeping Washington in check, Mr Bush, as one Republican analyst puts it, has been spending like “a drunken sailor”. The ever-widening war on terror, of course, accounts for much of that. According to an analysis by Veronique de Rugy at the libertarian Cato Institute, defence spending has jumped by 27% in real terms under Mr Bush, and just this week Congress approved his $87.5 billion supplemental request for Iraq. But non-military discretionary spending, (that is, spending that must be appropriated by Congress every year) has risen by 21%. Much of that increase is on homeland security, but not all. Mr Bush has merrily accepted spending bills stuffed with local pork. He has thrown money at America's farmers. He also supports a huge rise in hand-outs to America's elderly. With White House backing, Congress is about to include a prescription-drug benefit in Medicare, the government health-care plan for old people, in the biggest expansion of that programme since it began in 1965.

The combination of a sharp economic slowdown, tax cuts and higher spending has transformed America's budget. When Mr Bush ran for office, the fiscal surplus was 2.4% of GDP, one of the highest among big rich countries. By fiscal 2003, the budget deficit had reached 3.5% of GDP. Next year, by official forecasts, it is expected to reach 4.3% (see chart 1).

According to the Bush folk, this shift is unfortunate but hardly worrying. America, they claim, was hit by an unprecedented combination of economic slowdown, terrorist attacks and stockmarket collapse. But now, boosted by tax cuts,buoyant growth coupled with disciplined spending will soon stem the red ink.

Not everyone shares this nonchalance. A poll by ABC News and the Washington Post, published on November 2nd, showed that 53% of respondents disapproved of Mr Bush's tax policy. The large cast of Democratic presidential hopefuls claim Mr Bush's tax cuts have been a giveaway to the rich, wrecking the economy and mortgaging the future for America's children.

More sober analysts are also worried. In their most recent poll, members of the National Association of Business Economists described the federal deficit as the biggest problem facing America's economy. A bipartisan coalition of three economic think-tanks—the Committee for Economic Development, the Concord Coalition and the Centre on Budget and Policy Priorities—recently declared that, without a change in course, the next decade might be the “most fiscally irresponsible” in the country's history.

Who is right? The stakes in this debate are high, affecting not just America's economic future, but the world's. Deciding whether to be nonchalant or nervous means answering three questions. How bad is America's fiscal position? What caused the deterioration? And how easily can it be reversed?

A question of time

In the short-term, America's fiscal shift has been dramatic but hardly dangerous. Growing deficits flow naturally from a sharp economic slowdown, as tax revenues fall and benefit spending rises. Part of America's fiscal deterioration over the past three years has come from a slower economy. In addition, tax revenues fell further than anyone expected after the stockmarket bubble burst.

Spending increases and tax cuts have reinforced that trend, worsening the fiscal position but at the same time bolstering the economy. Few disagree that the administration's aggressive use of fiscal stimuli—along with record low interest rates—helped stave off a sharper global economic downturn. And with plenty of slack still in the economy, today's budget deficit is unlikely to squeeze out private investment. Look only at the overall deficit and at the past three years, and America's fiscal deterioration hardly seems reckless.

The medium-term picture is a different matter. Budget rules require Congress's number-crunchers to project the impact of tax and spending decisions over the next ten years. The cut-off is arbitrary, and leads to much accounting chicanery. But it shows, if you look carefully, what a mess America's finances are in.

The official figures are still relatively rosy. Back in January 2001, the Congressional Budget Office (CBO), Congress's impartial number-cruncher, was projecting a cumulative budget surplus of $5.6 trillion. This figure was always mythical, largely because it assumed that much of the tax take of the bubble years would be permanent. But it captured Washington's imagination and led Alan Greenspan, chairman of the Federal Reserve, to fret publicly that the government, once it had paid off all its debt, would then have to invest in private shares. That fretting, in turn, paved the way for Mr Bush's first tax cut.

In its most recent projections, calculated in August 2003, the CBO expects a deficit of $1.4 trillion over the next decade, a huge shift from its estimates of three years ago. But, taken at face value, the fiscal outlook is still relatively benign. Deficits peak next year at 4.3% of GDP and fall gradually thereafter. By 2012 the budget is back in balance. America's debt/GDP ratio, currently at 37%, peaks at 40% in 2005 but is back down to 30% by 2013, far below the levels of many other rich countries.

Yet these official projections, and similar ones by the White House, bear no resemblance to reality. The CBO is forced by law to make extremely implausible assumptions both about taxes and spending. The White House does so because it suits Mr Bush's political purposes. No fiscal expert believes either of them.

To be more realistic, the budget forecasts need adjusting in four main areas:

Extending the tax cuts. To stay within Congress's budget rules, the Bush tax cuts expire at various points over the next decade. But no one believes they will die. For now, the best political bet is that Mr Bush's tax cuts are all extended—worsening the ten-year fiscal outlook by $1.9 trillion if interest costs are counted (see chart 2).

Reforming the Alternative Minimum Tax (AMT). In an attempt to stop rich taxpayers avoiding tax by over-using deductions, Congress introduced the AMTin 1969. It has a lower rate but allows virtually no deductions. If your tax bill is higher using the AMT formula, that is what you must pay. Traditionally, few taxpayers have been affected by it: 2.5m in 2002. However, the combination of Mr Bush's tax cuts (which reduce taxes under the traditional system) and the fact that the AMT is not indexed to inflation means that it will affect far more people in future: 33m in 2010 and 42m in 2014. Politically, that will be explosive. But simply indexing AMT thresholds to inflation adds $690 billion to the ten-year deficit.

[eklipse]

Continued:

Making spending more realistic. Budget rules require Congress's official number-crunchers to assume that discretionary spending grows only by the rate of inflation, projected to be an average of 2.7% a year. In fact, the average annual rise in discretionary spending over the past five years has been 7.7%. And according to a CBO analysis, the Bush defence plans imply a 20% real increase in military spending by 2020.

But what is a more realistic figure? The coalition of economic think-tanks last month reckoned that, at a minimum, the ten-year figure for discretionary spending needed to be $600 billion higher. If you take the official figures but assume spending rises in line with nominal GDP growth rather than just inflation, then the deficit rises by $1.6 trillion, once interest costs are included. If the spending patterns of the past five years are continued, the deficit soars by a whopping $3.3 trillion.

Expanding Medicare. Since it is not (yet) law, the official forecasts do not include the cost of a Medicare prescription-drug benefit. Officially, this will cost $400 billion over the next decade, though most health experts reckon that rising medical costs mean it will be much more.

Add these factors together, and America's budget outlook is far worse than the official forecasts suggest. Among Washington's independent budget experts, the consensus is that the official figures understate the cumulative deficit by about $5 trillion. Rather than a budget that returns to surplus by 2012, America is more likely to see deficits that average 3% of GDP over the next decade.

All these projections assume a healthy average rate of real GDP growth, at 3% a year. Faster growth would improve the outlook, but would not eliminate the spectre of deficits. Contrary to the Bush team's rhetoric, America does not have a small, temporary fiscal problem. It has a large and growing one.

The economic consequences are indisputably negative. Big budget deficits reduce America's already abysmally low saving rate. As the economy's slack is worked off, Uncle Sam's demand for dollars is likely to crowd out private investment and reduce long-term economic growth. Even if the global capital market helps out, America is already enormously reliant on foreigners to fund its spending: the current-account deficit, the measure of annual borrowing from foreigners, is at an historic high of 5.1% of GDP. Big budget deficits will aggravate these external imbalances and so raise the risk of financial volatility, even a dollar crisis. Over the next few years, that is perhaps the biggest risk that Mr Bush's fiscal policies pose for the world economy.

No Ronald Reagan

Grim as it is, the medium term appears rosy compared with America's long-term fiscal outlook. The retirement of the baby-boomers, increasing life expectancy and inexorably rising medical costs mean that the cost of funding America's commitment to its old people will soar over the next few decades.

The numbers are mindboggling. According to Jagadeesh Gokhale and Kent Smetters, in a study for the American Enterprise Institute, the gap between America's future tax revenues and future spending commitments for Social Security and Medicare is $44 trillion, or four times America's GDP. Put another way, government spending on entitlements is set to soar from around 7% of GDP today to 11% in 2020 and 15% in 2040 (see chart 3).

This will never happen. America, like all other rich countries, will be forced to cut entitlements and/or raise taxes to deal with its ageing society. In fact, with a younger and more fertile population, America is, even now, in a better position than many others in the rich world. Moreover, this long-term fiscal time-bomb existed long before George Bush became president, though his tax cuts mean that America will have fewer resources to defuse it.

One theory is that this was exactly what the White House intended all along. According to this reasoning, Mr Bush has two basic fiscal goals, both of which mark him out as a radical conservative reformer rather than a reckless spendthrift. The first is to starve government of money to force it to tackle entitlement reform. The second is to reform the tax code in the process, moving gradually away from taxing income towards taxing consumption.

Unfortunately, this attempt to impose logic on the Bush strategy is belied by the administration's own actions. For all the talk of Social Security reform, the only White House action on entitlements has been to expand them. The contrast with Ronald Reagan is revealing. The Gipper cut discretionary non-defence spending by 13.5% in real terms and made an effort to overhaul entitlements. In 1983 a commission on Social Security reform raised the retirement age as well as payroll taxes.

Look closely, and Mr Bush is also much less of a tax reformer than Mr Reagan was. In 1986, the Gipper presided over the biggest tax reform in modern American history. The tax base was broadened and rates were lowered, but the overall tax burden remained unchanged. Although Team Bush wants a reformed tax code, aimed at consumption rather than income, their strategy of tax reform via tax cuts will not produce a clean reform. Many of the subsidies and loopholes of the current system will remain. The result will be a narrower tax base, full of distortions, which shifts the burden of taxation towards poorer Americans.

The other big difference with the Gipper is that Mr Reagan was not averse to putting up taxes when too much red ink appeared. Taxes were raised several times during his presidency. Congressional rules on deficit reduction were introduced during Mr Reagan's second term. So far, at least, Team Bush has shown no such flexibility. There is no admission that America faces a fiscal mess, and no shifting from the mantra that all tax increases, at all times, are bad.

The real reason to fret about America's fiscal outlook is that this self-delusion shows little sign of changing. The Democratic presidential candidates are just as keen to spill red ink as Mr Bush, though on different priorities. They would roll back some or all of the tax cuts, but then go on to spend much, or all, of the recouped revenues on health care. The real debate in Washington is still about where to direct the red ink, rather than how to reduce it.

At some point, however, both Mr Bush and the rest of Washington will be forced to leave this fiscal Neverland. When will that be? Many look to the late 1980s and early 1990s as a model. Then, years of persistent fiscal deficits persuaded Americans that belt-tightening was necessary. Budget rules were introduced, spending was cut and taxes were raised. It was politically painful (particularly for George Bush senior, who thereby lost the 1992 election). But the tide of red ink was turned.

This time the turnaround will be much tougher. There will be no “peace dividend” from the end of the cold war (indeed, the pressure on military spending may continue to increase). America is unlikely to see another stockmarket bubble, with its surge in tax revenues. As baby-boomers retire, the pressure from entitlement spending will be more acute. Set against this background, the path back to a sustainable fiscal policy will be extremely painful, even without any dramatic fiscal crisis. Long after Dubya is back on his ranch, Americans will be trying to recover from the mess he created.
................................


Disclaimer: Any similarity to other threads, living or dead, is purely coincidental.

[Y3a]

But it's mostly assumptions. Projections, simulations. etc...

[Troll]

Can someone who understands economics a little better than I, explain where I'm going wrong here.

America has a deficit. That means it's spending more money than it makes. The rest it borrows from other countries. So am I correct in saying that Americans are living beyond their means and they're doing so on the backs of the rest of the world? Basically, the rest of us are invested in America Inc. to the tune of around $80,000 per family not so?

Obviously we're relying on the US economy to be a good investment, that is for the US to grow and pay back our loans. Now if I was the bank and a guy with huge debt came to me and started asking for more money, I'd get a little worried. I'd say no to giving him more and I'd start thinking about getting the rest out before he is no longer able to pay. With the Dollar going backwards, is that not what we're seeing here? People deciding that other investments are better?

And while we're at it, with practically all countries in the developed world running deficits at the moment, where is the money coming from?

[Zimphire]

AH the economy is up, people filing for unemployment is down, It's to be expected the left start attacking the deficit.

Esp during a time of war.

[dreilly1]

Originally posted by Troll:
Can someone who understands economics a little better than I, explain where I'm going wrong here.

America has a deficit. That means it's spending more money than it makes. The rest it borrows from other countries. So am I correct in saying that Americans are living beyond their means and they're doing so on the backs of the rest of the world? Basically, the rest of us are invested in America Inc. to the tune of around $80,000 per family not so?

Although there is probably more money begin borrowed from foreign sources lately, there is also a fair amount that is being held in bond mutual funds and retirement plans, which US workers depend on. Also, any money that Social Security takes in that is not spent as benefits can only be invested in US bonds, IIRC. If that's correct, it's a back-door way to "borrow" money from the Social Security "lockbox" for use by the government. OF course, the interest will be due eventually.

That's why it's somewhat incorrect to assume that debt is bad all of the time: While debt is bad for you can me, for a country it all depends on who you're borrowing from. If you're mostly borrowing from your own people, then won't the interest paid be used by these people directly, making them less reliant on govermnent help?
Remember also that a country has many more options about how to finance its operations than you or I do, because it controls the money supply, although timkering with that may adversely affect interest rates.

[BRussell]

The debt isn't borrowed from other countries. I'd have to look it up, but I believe the vast majority of the debt is paid for by Americans. The government issues securities like bonds, and people give them their money so they can earn interest. Of course, non-Americans can buy American Treasury securities, but I'm pretty sure it's mostly Americans. Eventually, the government has to pay those back plus the interest, which is why debt is a bad thing. Unless you're a Republican, in which case it's magically OK.

[dreilly1]

Originally posted by Zimphire:
AH the economy is up, people filing for unemployment is down, It's to be expected the left start attacking the deficit.

Esp during a time of war.

I remember when the Republicans were the party of fiscal responsibility and balanced budgets, and Democrats were the big spenders and borrowers for pet projects and entitlements. What happened?

And even when you take out the spending on the war, Bush is still spending just as much, if not more, on everything else than previous administrations did. Republicans used to hate "tax-and-spend", how come "borrow-and-spend" is different?

[DBursey]

America's federal debt, like that of most countries, is issued as treasury bills, bonds and other securities sold at brokerages the world over. It is estimated that from twenty to twenty-five percent of American debt is held by foreigners, with Asian investors owning the greatest share. The Wall Street Journal recently reported that Japan was the largest foreign holder of U.S. treasury bills, with a holding of something close to $400 billion. Much of that is derived from Japan's huge trade surplus with the U.S. China is also a large (and growing) holder of American debt.

[lil'babykitten]

Deja vu?

[thunderous_funker]

Originally posted by dreilly1:
I remember when the Republicans were the party of fiscal responsibility and balanced budgets, and Democrats were the big spenders and borrowers for pet projects and entitlements. What happened?

A popular myth. I'm unaware of any Republican president who has balanced the budget in the last 40-50 years.

They also spend just as much as Democrats (sometimes more) they just spend it on different things.

[Zimphire]

Originally posted by dreilly1:
I remember when the Republicans were the party of fiscal responsibility and balanced budgets, and Democrats were the big spenders and borrowers for pet projects and entitlements. What happened?

I've never made that claim.

[ambush]

Originally posted by Zimphire:
AH the economy is up, people filing for unemployment is down, It's to be expected the left start attacking the deficit.

Esp during a time of war.

better to rotfl about it than to cry about it, eh?

[dreilly1]

Originally posted by Zimphire:
I've never made that claim. [/B]

I never said you made that claim now, did I?

[Zimphire]

Originally posted by dreilly1:
I never said you made that claim now, did I?

Then what did it have to do with MY post?

[tie]

Originally posted by Zimphire:
AH the economy is up, people filing for unemployment is down, It's to be expected the left start attacking the deficit.

If the problems with the economy are over, then shouldn't we all start attacking the deficit? If the short term crisis is past, then it is time to get a responsible budget.

Esp during a time of war.

LOL! A war!

[Zimphire]

Attacking the deficit will happen when the people in charge at the moment thinks it should be happening.

Not when arm chair politicians posting on web forums thinks it should happen.

That includes myself.

[kvm_mkdb]

Originally posted by BRussell:
Eventually, the government has to pay those back plus the interest, which is why debt is a bad thing.

If the government ever has to pay it back (even just 10% of the issued bonds) we'll be in big trouble. Not likely to happen, though.

[gadster]

Originally posted by Zimphire:
Attacking the deficit will happen when the people in charge at the moment thinks it should be happening.

Not when arm chair politicians posting on web forums thinks it should happen.

That includes myself.

It seems the arm chair people in charge thinks you have it wrong. Jesus, just what is it about religious nutcases and coherent English? Lack of education? Or lack of concentration? There's the start of a PhD, right there. As for 'the people in charge' comment - that's a whole other thread. No one is in charge, you pelican. You are. Stop hiding behind your faith and be who you could be, ya nong.

Love,

[Spliffdaddy]

what is it with non-religious people always having to belittle religious people?

Insecure?

[Lerkfish]

Originally posted by Spliffdaddy:
what is it with non-religious people always having to belittle religious people?

Insecure?

they often believe religious people are uneducated, easily mislead idiots. Unfortunately, some religous people do little to persuade them otherwise.

[gadster]

Back on topic . . . it's not red ink you are sinking in . . .

[gadster]

Originally posted by Spliffdaddy:
what is it with non-religious people always having to belittle religious people?

Insecure?

Read between the lines and you'll see empowerment, not belittlement.

[Spliffdaddy]

um, no, I see an insecure person who is mad at God.