Bubble Bubble, Toil and Trouble.

I've been following the situation in Greece and seen the comparisons with the United States and I've been disappointed that the analysis always focuses on the annual deficit.  Sure, Greece and Spain spend more of their GDP than the US does, but that analysis seems to ignore the massive entitlement meltdown that the US is destined to endure.  The federal government's Medicare, Medicaid and Social Security obligations now total about $107 Trillion, and that's not factored in to the fiscal equation. 

Of course, there's an obvious solution.  Just take the present value of all the obligations and the present value of all the future revenues and then compare them.  That's what the Financial Times has done for both Greece and the US and the result is really sobering.   (Long excerpt below)

This is classic bubble behavior--we all know that the US Government is never going to be able to pay off these obligations, but the collapse could be years away, and until then, the US still seems like the safest place to put money...until it isn't.  At that point, the money rushes out very quickly and the bubble collapses.  So we are in the middle of a US based sovereign debt bubble that is being kept inflated by the the willingness of foreign governments--mainly China--to park their money in our currency until they have a better option.  They understand that there are really only three possible outcomes...inflation, the collapse of the dollar or outright default.  But at the moment, those outcomes look to be far off, so they stand ready to pull their money out of the US while they continue to work to find a safe alternative. 

As in all bubbles, we can't tell the timing or the triggering event, but something is going to cause a major panic.  It may be next week, or it may not be for 20 years, but at some point, investors are going to react to the knowledge that these obligation are going to come due.

Here's the article.

Fortunately, theory suggests a label-free measure of fiscal status: the fiscal gap, or the present value difference between all future expenditures and receipts. The Greek fiscal gap is staggering. Calculations developed with my colleagues at Freiberg University put it at 11.5 per cent of the value of Greece’s future GDP. And this huge figure already incorporates Greece’s recently legislated fiscal policy retrenchment. But the US figure, based on the Congressional Budget Office’s just-released projections, is even larger: 12.2 per cent.

Clearly, Greece is in terrible fiscal shape. To get its books in order it would have to pull in its belt each year by another 11.5 per cent of GDP. This provides new meaning to the word draconian. But the US is in much worse shape, because the CBO’s projections that reveal the 12.2 per cent fiscal gap already assume a 7.2 per cent of GDP belt-tightening by 2020.

But the assumptions underlying this 7.2 per cent adjustment are highly speculative, including a substantial rise in the share of taxpayers facing the Alternative Minimum Tax, once called the “millionaires tax” for targeting only the rich. The CBO also assumes that real wage growth will push all workers into much higher tax brackets, and that Congress will slash discretionary spending as well as greatly limit growth in Medicare and Medicaid benefits. Each supposition runs counter to recent experience.

Wishing won’t fix America’s fiscal mess. The US is one foot away from a deep and permanent economic grave. It is far past time to do meaningful long-term fiscal planning, level with the public, and implement radical reforms that permanently put America’s fiscal house in order.

Comments

[Patrick]

And I'm sure you would have written this article in December 2008 or earlier, right? Gotta love these deficit-hawk Republicans that supported Dubya's tax cuts, two wars and squandered budget surplus and now have found religion on the issue now that Obama is president. I suppose you also supported Clinton's deficit reduction plan in 1993 that resulted in historic budget surpluses, right? Of course not.

[James Strock]

Patrick--I can't speak for Greg, but more generally there are a LOT of us who publicly challenged the G.W. Bush administration's spending levels as dangerous--and now the Obama's administration has done far more than double down from what it inherited.

Our nation finds itself facing choices so grievous that our political officials (it would be inaccurate to call them "leaders" in all but a few cases)tend to offer distraction rather than focused discussion.

Kotlikoff's analysis is backed by many others. The alluring temptation of officeholders is to inflate the currency rather than increase productivity, thrift, savings and investment.
The dangers of that approach are immense.

We've already glimpsed the beginning with the moral hazard unleashed in the wake of various federal government bailouts in the past few years--which is no small part of what kindled the fire underlying the Tea Parties.

Thanks to Expresso Pundit for helping keep our attention on this coming moment of truth.

[James Strock]

Of course, I should have written "Espresso Pundit"... :-)

[Brian]

Oh, yes, the Omnibus Budget Reconciliation Act of 1993 where Al Gore broke a tie vote passing massive tax increases on people and corporations, eliminated the cap on Medicare taxes, raised the gas tax and various other tax increases. As I recall, 41 Democrats in the House joined Republicans, voting against Clinton's tax increases.

I love it when liberals tout budget surpluses gained through over-taxation and then cry foul when conservatives give people their money back.

The GOP lost control of the House and Senate because of their lack of fiscal restraint, and rightly so. Just as the Democrats will lose several seats in the Fall because of their lack of fiscal restraint.

As for the wars, I am all for pulling out and saving US taxpayers the cost of financing another round of nation building. Odd how you gloss over Obama's continuation of these two wars. What happened to his promise to pull out?

[Brian]

And I also love how you gloss over the largest budget deficit EVER!!! Let's talk about fiscal restraint, shall we? Here's a hint, it won't come from the Democrats.

[Patrick]

Brian, get a clue. Back in 1993, the Clinton Administration set us on the road to the greatest post-war economic expansion in our history -- without a single, Republican vote. It's exhibit A in showing how supply-side economics is totally bunk. Also, Republicans wanted to give money back? What? I thought you were deficit hawks? Surely, you understand the difference between the budget deficit and the accumulated national debt...right? The budget surplus had only begun to pay that back - so why reverse course and give it all away? And for what? Do you really want to compare the Clinton economy with the Dubya one?

The GOP lost seats because of the unpopularity of Dubya and the economic collapse brought by lack of regulation of Wall Street banks, not because of the deficit.

Running a deficit in bad economic times is good policy; running a deficit in relatively good financial times is almost criminal.

This is still the Republicans' Recession.

[Grandma]

Yes, entitlements are the problem.

Cat Food Commission to the rescue!

[I'm mad as hell...]

The truth of the matter is Congress has the power to tax and spend, not the President. No matter who is in power, democrats or republicans, they both spend on their pet projects, democrats on social programs and republicans on the industrial war machine. Both parties have created a federal government that is so large, it can no longer be controlled. What is needed is a shrinking of the federal government and more power and tax revenues returned to the states and municipalities, most of which have balanced budget requirements. Imagine if every dollar the Feds send to the states and municipalities through grants were in fact eliminated and the local goverments could decide if they would like to fund the same level of services through new local taxes. Nirvana.

[Mesa Econoguy]

[repost - typepad doesn't like links and therefore sucks]

Bush did nothing to help the situation, but Democrats (in charge of the purse for 4 years now, Exec. for 2) have managed to blow out the national fisc:

From 2007 - 2010, (Democrat) spending as a percentage of GDP has gone from 35% to 44%.

Their solution? Raise taxes on the most productive segment of the economy when private stimulus is most needed:

http://blogs.wsj.com/economics/2010/07/24/number-of-the-week-ending-tax-cuts-makes-only-small-dent-in-debt/

Pathetic.

[Mesa Econoguy]

And "supply-side" economics (whatever that is) isn't "bunk" at all, it's provided 30 years of unprecedented economic expansion, after the 50 years of economic catastrophe proffered by failed Keynesian amateurs (including Keynes).

[todd]

Mesa Econoguy,
How much of the change is related to increase in spending vs. decrease in GDP. I think your comparison needs some context. Also, the 30 years of economic expansion is not quite accurate. The economy under Reagan did quite average and Bush I and II was quite bad. Under Clinton there was a significant expansion which was slightly longer than the one under Kennedy and Johnson. However, if one looks at the most impressive expansion over time periods you are talking about that would be post-WWII when taxes were higher on capital and the wealthy, we had robust labor unions, and Keynesian economics was still in vogue.

[Mesa Econoguy]

Todd,

Absolutely true, and when you combine the Democrat dictatorial equal outcome legislation, Democrat meddling financial requirements (consumer financial "protection" agency), and Democrat-led takeover of 1/6th of the economy (Obamalinicare), you get juuuuuuust a bit of negative future economic expectation.

That's why 1) you will see no significant mkt gains in the next year (incentive to move earnings to current year), and 2) unemployment will remain at or above 9% for an extended period. There's a 3) there as well, but I'll let you fish that one out.

Mind you, Republicans are minor role players as well, but this calamity is nearly entirely Bawney Fwank-party-driven.

Bush I recession was historically very mild, but he lost because he was inept.

As far as higher taxes = prosperity postwar, wrong.

Nobody paid those taxes. Reagan wrote those loopholes out (1982, 1986).

Go learn economic history, amateur.

[todd]

Besides the absurdly high levels of defense spending and spending on foreign wars and occupations, the only true spending problem is related to Medicare and is due to the out of control increases in medical costs in the US. IF the US had the same rate of increase as other Western nations we would actual not be in trouble. From the recent debate it is clear that neither party is actually interested in doing anything about it. Democrats can't even get tepid reforms like a public option through the Congress they control and the GOP has been running around screaming about Obama gutting Medicare.

As to the comparison with Greece, I think it is important to point out that 1/3 of the Greek economy grey/black market and so they have some serious revenue problems. But the real problem is that they ran deficits even when the economy was strong. Greece has such a structural deficit that even when the economy picks up the government would have huge deficits. In the US if/when the economy picks up this will have a substantial impact on reducing the deficit.

[Mesa Econoguy]

Dear IMF:

Since the recent US debt downgrade due to our massive welfare overhang, and subsequent second recession, we're in a bit of a pinch. We've been good neighbors, supportive of poor countries and all, and we're wondering if you'd be able to float us a short recap loan, before the Chinese give Iran the ok to nuke Israel.

See, when we default, they [the Chinese] have no incentive to listen to us any more.

That's not on the 2012 election strategy, so any help you can provide would be greatly appreciated.

Signed,

Obamalini

[duh]

If the US spent $0 on national defense next year, the deficit would still be nearly $700 billion. And we might have a problem or two.

Bush's budgets never crossed above about 4 percent of GDP -- high, but not endangering the economy.

With the nation's fiscal policymakers now "hoping" to limit deficits to "only" ten percent of GDP, we now have a serious problem and threat of eventual default.

It's time to get serious. What is this nation going to do?

[RgP]

Mesa Econoguy-

I'm with you on this issue, but why resort to name-calling? You could have easily left "idiot" off the end of your post, and it would have been just fine.

Leave the name calling to Robert Woodman.

[todd]

Mesa Econoguy,
You claim no one paid those taxes (post-WWII to Reagan) and it is certainly true that there were many loopholes and that this is why having a high marginal rate at some point likely causes less taxes to be collected (exactly at what point is open to question). Also my argument is certainly not that high taxes caused the postwar boom, but rather that a strong economy is not necessarily discordant with high taxes on wealthy, strong unions, etc.

I may be an amateur, but I have looked into this question and I know that both effective tax rates on corporations and top 10% of income earners have dropped considerably during last 40 years. The fact that you have several economics degrees and I have zero would only be important if one could not find well-established economists with multiple degrees who would make the same point I make. Since there are plenty who do, then the issue here is not degrees but how one is choosing to understand the data.

[Mesa Econoguy]

Todd (amateur):

Your economic nonsense is spewed all over left wing chat rooms and Kos. Correlation is not causation. And you either conflate or simply ignore cause and effect ("structural imbalance" see above).

You have about 1/30th of the full economic picture from your short attention span left wing sources. It is precisely left wing economic policies which have put us in the position we find ourselves in today (with a lot of Republican help, I should add). This massive selective ignorance on the left's (your) part only serves to perpetuate the negative stereotype - you lefties are completely economically clueless.

You are seriously mistaken if you think that the threat of insanely onerous regulation, threat of legal action, and higher taxes constitute economic stimulus. That's what we in the econ and financial world call a Krugman (i.e. completely wrong).

This economy will continue to go nowhere as long as this president and congress are present. Complete rank amateurs which likely explains your affinity for them.

[todd]

"Correlation is not causation."

Yes I know, however, you seem to be the one suffering from this fallacy in your own reasoning. I also notice you simply make assertion with no actual arguments or data. Is that what 'experts' do?

The lack of growth and positive news in unemployment doesn't need to be attributed to vague bad feelings about predicted future regulation or taxes that the financial world has, when there is a much more mundane cause. 70% of the economy is tied to consumer spending and consumers have just seen the value of their homes and retirements drop several trillions of dollars. People have no money and were already overextended on credit and until this changes we are in for a sluggish economy.

[Patrick]

Mesa Econoguy is an a-hole. And wrong on just about everything. Think you know more than Krugman? Guess what -- you show your Nobel Prize and he'll show you his. Oh that's right, you are the arm-chair amateur and he is the world-renowned economist that has one. Glad we got that settled.

[Mesa Econoguy]

Yeah, ok, whatever Patrick. Krugman can have a party with Al Gore, and maybe get some action.

Just to beat this to death, this is exactly what I'm talking about:

http://online.wsj.com/video/opinion-journal-the-obama-pelosi-gdp/F411DE47-08C5-4013-BBEB-EEA42212A652.html

Today's paltry 2.4% Q2 GDP number is evidence of incentives taking form: software & tech capital investment has done well so far in the recovery, because businesses would rather invest in automation than hire people, since people are now entitlement magnets (thanks to mandatory healthcare: http://www.bloomberg.com/news/2010-07-30/health-law-needs-repeal-commentary-by-douglas-holtz-eakin-michael-ramlet.html ), and significantly more expensive than they used to be (thanks to mandatory healthcare, and several other factors).

Regime uncertainty coupled with regulatory and operational impediments is killing this recovery.

No member of this administration, or the left, understands this.

[Mesa Econoguy]

Finally, todd, your example of (abnormally) high tax rates "coexisting with" or "creating" prosperity is flimsy because it ignores the loopholes and substitution effects present during that period. There is no economic evidence that high taxes and burdensome regulation promote growth.

There is economic evidence that high taxes inhibit and reduce growth [see, e.g. Christina Romer, David Romer, The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.3.763 ].

It's a shame Obamalini doesn't consult his own chief economic advisor.

[todd]

Mesa Econoguy,
How many times to I need to repeat myself that I never said high taxes lead to growth before you stop beating the straw man to death. You keep pointing to the loopholes that you claim I am not accounting for but you produce no actual data indicating that effective tax rates were lower than now because they were not. Not on the wealthy and not on corporations.