The Inevitable Financial Crisis

By Mike Razar

Back in September of 2010, I wrote an article in which I pointed out that the US has recoverable hydrocarbon reserves worth more than 50 times the amount of the national debt.  That is with current technology.  By the time all is said and done, an excise tax or royalty in the neighborhood of 5% could probably pay off the entire debt in our children's lifetime, if not in our own.  We are a very lucky country.  Everybody wants to move here.  Few want to leave.  We have a superb higher educational system.  We still enjoy considerable freedom.

Idealistic (?) environmentalists block our exploitation of the underground riches, but no doubt a few years of depression will convince the American public that carbon dioxide is good for them.

Meanwhile back in the Capitol, threats and lies issue from leaders whose math education seems to have stopped in the fifth grade, while their political avarice seems to rise daily.

Both sides warn of a possible default even though we have seen that our net debt to equity ratio as a nation is less than 2%, maybe even less than 1%.

Much of the mythology surrounding discussions of federal budgets and debt come from economists who have taken over the ancient role of fortune-tellers to assure us (for example) that they know the GDP in October of 2017 within a 1% margin of error.  Have you not noticed how bad their track record is on one- or two-quarter projections?  It is sheer hubris for either side to think that long-term budget problems are tractable.  We elect a new Congress every two years, a new president potentially every four years.  Over the course of a decade or two, the economic and political facts on the ground are likely to change several times.  No law passed today is apt to survive intact even one election cycle.  Yet we continue to seek long-term fixes.

If you believe either side, they are arguing over whether to cut $2T or $4T of spending and to raise up to $2T in revenue by increasing tax bracket rates or by plugging loopholes.  I can't seem to tease out enough details from anyone in the leadership to discuss proposals concretely.

Interregnum: Do you see what I just did?  I shifted from actual numbers to ten-year estimates.  Are you really buying that from our rulers?  Notice that $2T over ten tears is an average of $200B per year.  If you ever see the actual numbers being projected they will surely be unbalanced, with lots of extra revenue in the first few years and reduced outlays only near the end of the decade.  The trouble is that the end never comes.  By then it will be the start of a new decade.  All the revenue projections are optimistically high while expenditure projections are low.

For some reason, lots of people are impressed with careful calculations to many significant places.  Personally, I prefer rough estimates.  They are easier to follow and harder to refute convincingly.

Take the Bush tax cuts, for instance.  The part that goes (or has gone) to the rich is said (by the left) to amount to about a third to a half of the benefit.  The only major part going to the rich is the cut in the top bracket rate from 39.6% to 36%, roughly ten percent.  Now much of the income earned by the rich is subject to lower tax bracket rates.  So a rough estimate is that they have paid (or will pay) at most 10% lower taxes annually under the Bush rate.  Once oneaccounts for deductions and other dodges, an estimate of 5% is probably closer to the truth.  Let's call it 8%.

How big is the share of personal income earned by the folks who are affected by the top bracket?  It is around 40% of total taxable income nationwide.  That means the Bush tax cuts cost less than 4% of personal tax revenues.  Similar math applies to capital gains and dividends.  Annual personal income tax receipts only just reached a trillion dollars.  For eight years when the Bush cuts were in effect, total receipts from personal income taxes amounted to around $6T.  Five percent of that is only $300B for the whole eight years.  During that time the debt increased by some $4T.  Less than 10% of the Bush deficit was due to lowering taxes on the rich.  If any progressives read this, please offer a refutation if you can.

Going forward, the 5% of personal income tax made available by repealing the Bush tax cuts amounts to around 2% of revenues or 3% of the deficit.  Sure, it sounds big when you multiply by ten and scream that the rich can afford to pay a mere $500B more over the next ten years, but it remains at best a 3% reduction in the deficits for the decade.

If there are any smug conservatives reading this, wipe that smile off your face.  Where do you expect to find even a modest $2T to $4T in cuts for ten years?  That is only, say, $300B per year.  But you aren't going to touch Social Security or Medicare during that decade.  Even if you gut the military budget to save half of that, you would still be left with $1.5T in discretionary cuts.  That is only $150B a year, but it is out of only around $600B a year in discretionary spending.  That would be a full quarter of discretionary spending -- military and non-military.  Go ahead...name names!

If only it were that easy.  At the beginning of this article I asserted that projecting income and revenue is really hard to do.  But it is easy to calculate expenditures under current law.  The whole $300B per year referenced above will not cover built-in increases in entitlements.

It appears that the Tea Party and other interested Americans must choose the small lie of the Republicans or the big lie of the Democrats.

In the past few months, shale-fracking has pierced the national consciousness.  Even liberal rags feature it in cover stories.  Their main concern seems to be the environmental hazards posed by current technology.

My hope is that one of presidential hopefuls will start running on all-out energy exploitation.  Some of them are close to it, but they need to connect the dots to both national security and the economy.  I am even quite optimistic that some will do so.

Meanwhile back at the debt limit ranch...I hope I don't anger my fellow conservatives, but what on earth are you trying to do?  The current debt and its current rate of increase resulted from legislation passed by lawfully elected Congresses and presidents.  It is the bloody law of the land.  We have seen that democracy is not important to the progressives.  Is it just as meaningless to conservatives?  I am thrilled to see Eric Cantor leading the good fight for spending cuts and no tax hikes.  I would vote for him for president in a heartbeat.  But I believe holding the debt limit hostage in that fight is a huge error.  The only way to reduce spending and taxes is to elect a conservative majority to both Houses of Congress and the presidency.  Trying to have that fight now makes no sense.  Risking an Obama-engineered default is not smart.  I agree that there should be no default (see next paragraph) even if the debt ceiling is unchanged, but why risk any financial disruption that the left can blame on "childish" or intransigent conservatives?

The ignorance or venality of the left seems boundless.  How could we possibly default on anything?  Certainly, it should be impossible to default on Social Security and Medicare.  I have been a longtime skeptic on the so-called trust funds.  Simply stated, you can't owe yourself money in any meaningful sense if you are net in debt.  However, now I can see a purpose to the trust fund charade.  Follow me carefully:

1. No new debt can be issued after August 2.
2. An average of close to $200B of revenue comes to the Treasury each month.
3. An average of a bit more than $325B is needed to pay all federal obligations each month.
4. Approximately half of that ($150B, or so) is for Social Security and Medicare benefits.
5. That leaves in the neighborhood of $175B to spend out of only $50B left over.  Right?
6. Wrong!  Use the whole $200B to cover the $175B in outlays and get the money needed for Social Security and Medicare by selling old treasury notes from the trust funds.
7. What a cool idea!  Did I forget to mention that the trust funds currently have more than $2.5 trillion dollars in US Treasury IOUs?  As progressives have been assuring us for years, that is as good as gold.  They are backed by the full faith and credit of the United States of America.
8. Is that the greatest bait-and-switch in history or what?  We can't issue any new debt, but that paper has been accumulating for 75 years.  It is debt already issued by the US Treasury.  Selling it appears to violate no law.
9. Crisis averted!  Any questions, children?