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Economy

The Coming Crisis

Generations have been scarred by war and disease in the past. Lives have been destroyed by tremendous disasters-- hurricanes, tsunamis, earthquakes, plagues. Often times these crises come with little warning and are not understood until it is too late to stop them. The crisis facing the current youth of this nation, though, is entirely foreseeable-- and entirely avoidable. We actually know that it is going to happen, why it is going to happen, when it is going to happen, and how bad it is going to be. We have all the tools and knowledge at our disposal to avert this doomed future. Yet, despite this tremendous foresight, we do nothing. We lack the will to meet this challenge and slay this beast before it devours a generation of people.

The issue I speak of is our massive debt. The scope of this danger is generally misunderstood by the public, and often spoken of in vague terms by our politicians. It is not very romantic or seemingly heroic to want to tackle it, but at times our leaders pretend to. It has become common of late to entertain arguments over the defense budget, foreign aid, funding the National Endowment for the Humanities, whether or not Smithsonian museums should start charging for admission, and shrinking the federal bureaucracy. Democrats and Republicans argue over these issues as if they will have any impact on the coming crisis. Noble as it may be to tackle the government's discretionary funding, it will do nothing. The government can shut down every branch of the Armed Forces and pull the salaries of every bureaucrat in Washington and this nation's fiscal future will still be doomed. If we are to avert this disaster, then our leaders must become statesmen willing to go after the programs that are usually sacrosanct in the minds of politicians-- entitlements. Social Security, Medicare, and Medicaid will force this nation to its knees and bring about the economic ruin of the greatest economic force the world has ever known. Imagine the chaos we have seen in Greece amplified a hundred-fold. According to the Congressional Budget Office, if something is not done, then by the year 2050 the tax rate will be 47% for the middle tax bracket and 66% on the highest earners; in 2082, it will be 88% on the highest earners.

Congress must turn to the entitlement programs within the next four or five years if we are to avert this crisis. We can see it; we can do something about it. Unfortunately, the people that these programs are most important to are also the ones who politicians are most beholden to, because they tend to be the ones who vote. Young people need to start speaking up more about this if Congress is to really be held accountable on this issue. This is why programs like the Heritage Foundation's Slay the Beast are useful and should be spread and replicated. And, for those of you who (like me) sort of get a glazed look in your eyes when economists bring out graphs and start talking about numbers, videos like this are of huge help (as are this one and this one).
Categories > Economy

Discussions - 7 Comments

If this issue is not addressed in spite of everyone's knowledge that the storm is coming, then the Baby Boomers will go down as an especially infamous generation in American history. Clinton's presidency depicted it best: accidental prosperity, nonchalant amorality, and a shrug of the shoulders in the face of a growing and foreseeable threat.

Do you have a citation or explanation for this?

"According to the Congressional Budget Office, if something is not done, then by the year 2050 the tax rate will be 47% for the middle tax bracket and 66% on the highest earners; in 2082, it will be 88% on the highest earners."

As far as I can tell those numbers will probably be how high the tax rates will have to be to get on a path to paying down the deficit.

But actually I don't even see how it is possible to project what happens if something is not done.

Actually if something is not done then we will never get deficits that are that large. That is because if nothing is done the deficit ceiling remains the same.

Now everytime we get close to the debt ceilling we raise it, and that is one thing that can be done about the deficit.

The shot glass YouTube video is pretty cool, but it is not altogether great because while it is foreseeable that drinking that many shots of Jack Daniels will give you a hangover, it is not all that clear what a huge deficit will do.

"We actually know that it is going to happen."
explain.

"why it is going to happen."
explain.
"when it is going to happen."
explain.
"and how bad it is going to be."
explain.
"We have all the tools and knowledge at our disposal to avert this doomed future."
presumably not raising the debt ceilling and thus raising taxes(either rates or deductions) and cutting spending.

"Yet, despite this tremendous foresight, we do nothing."
In part because the market and institutional interest of politicians and the vast majority of american people is more goverment spending and less taxes. Harry Reid will call 74 billion in cuts draconian, and tax increases in similar ammounts will also be hotly contested.

Lets say I don't believe the CBO. That is I don't think that by 2050 the tax rate will be 47% on the middle tax bracket and 66% on the highest earners.

I am more comfortable projecting that congress will raise the debt cap, time and again.

The debt cap currently stands at 14.3 T.

Currently middle is 25%(for individual 34k to 82.4k) and the high is 35% (on everything above 373,650).

Now I predict that between 2010 and 2050 we lose some deductions, and while the tax rates are raised they are lowered during "recessions." I also project some bracket creep, say by keeping the tax rates nominal instead of adjusting for inflation. That said I am not sure the person making 34k to 82.4k will face a tax rate above 25% in 2050. I could see the 25% middle being the mid-low(34k-82.4k is mid low in 2050), with say the top being 45% (On everything above say 700k) with a 35%-40% bracket near the current 373,650 mark.

I also see a debt cap at 100 T in 2050, with about 16 raises accompanied by hang wringing and statements for and against according to the ideology/understanding of the Treasury, I also project a partisan switch in between. At some point democrats will be opposed to it, and republicans for it, which some are currently, except that it is a minority position to oppose it as a democrat, while it is a majority position for republicans.

The chief element which marks this crisis, is that all the negative elements of facing it are actually the crisis. To solve the crisis you have to cause the crisis.

Lets put it this way: Democrats favor raising taxes and republicans favor cutting spending. We have a 1.5 T deficit. A solution would be for democrats and republicans to agree ahead of time to pass a bill that eliminated this shortfall. Democrats would be locked in a room to come up with 750 billion worth of tax hikes. While Republicans woud be locked in a room to come up with 750 billion of program cuts. Both sides would covenant to pass the resulting budget.

This will never happen, and if it did it would provoke at least rhetorically an instant crisis.

I know I write some long meandering posts, but I at least I am not making conclusory statements about foreseeability.

Look Andrew, I could play the democrat and find 750 billion in tax raises, and you could play the republican and find 750 billion in program cuts. If together we were congress, and agreed to be bound we could pass the thing. But we aren't and we might not agree to be bound.

But leaving aside the massive difficulties and competing intests involved in ballancing the budget.

I am actually not sure if a budget with no deficit would be preferable to a budget with a 1.5 trillion dollar shortfall.

I don't think there is 750 billion dollars worth of waste in the federal government, and I don't think 750 billion dollars worth of taxes are preferable to borrowing that amount of money by selling treasuries.

My pro-deficit argument is getting weaker as the yield on the 10 year treasury just hit 4%, up from around the 2.5% range when I was calling everyone crazy given business liquidity problems + super low rate for the government.

I am still pro-deficit but less bullishly pro-deficit.

Events that will make me a deficit neutral:
Oil hits $120.
U.S. exports more than it imports.
yield on 10 year U.S. treasury climbs above 6%

Deficit Hawk:
Oil hits $150
yield on 10 year climbs above 10%
Unemployment hits 4%

The number 1 reason businesses and entrepreneurs fail is liquidity issues. They get caught with inventory they can't finance, and creditors make them liquidate.

As much populist anger as there might be from small businesses, the U.S. gov is not a small business, and it is fundamentally incapable of going broke.

Reductions in government spending will clip businesses, by choping aggregate demand. Forcing them into bankrupcy, fire sales and increasing unemployment. Higher taxes necessarily also have all of these FORESEEABLE consequences.

Actually if you really think this deficit will cause inflation then buy the TMV. This is an ETF triple levered to the inverse of treasury prices(30 year) (as treasury prices go down yield goes up). So if you think treasuries will get cheaper and more yield(will have to be paid on the deficit).

When I last wrote about the pro deficit position, this ETF was worth $33 dollars, now it is about $50.

If it is extremely foreseeable that interest rates will rise this is an excellent tool to capture it.

In any case I reiterate that the deficit isn't a problem until the cost of fixing it (recession brought on by higher taxes and reduced spending) is less than the cost of maintaining it.

To simiplify matters I choose the 10 year treasury as a bench mark for the interest rate we pay on the debt.

At some point the cost to the government of borrowing money will justify a serious slash in spending and tax raises despite the pain in bankrupcy and foreclosure that will accompany dealing with the problem.

Also I am in favor of using the estate tax to help pay off the deficit. That is some sort of mathmatical model should be developed to determine how much the average government deficit was weighed more heavily for the last 5 years of life when you cost the most to medicaid and social security.

One can only hope that The Stupid State, Illinois or Michigan goes bankrupt soon. I believe the Stupid State has about 18 months to complete shutdown. The reprecussions of this will be horrific. Maybe this will send shockwaves through the rest of the 49 states and the federal government as well. The message - The Free Ride or The Gravy Train has ended. Hope and Change is on its way and it isn't surround by Greek Columns. Ideologly is fun, but reality will bite.

"I am actually not sure if a budget with no deficit would be preferable to a budget with a 1.5 trillion dollar shortfall."

and

"As much populist anger as there might be from small businesses, the U.S. gov is not a small business, and it is fundamentally incapable of going broke."

What is your understanding of what is happening in Europe right now? I'm sure I'll flub some of the terminology - you are much more knowledgeable on this than I am - but from what I understand the massive amount of unfunded financial liabilities we have headed our way as the Baby Boomers begin to retire. So yes, this is entirely foreseeable in that we know the Social Security hammer is falling, we know that when a country's budget deficit hits 120% of GDP, a country stands on the edge of a so-called debt spiral in which the threat arises that the interest payments on the national debt will exceed the country's GDP.

I read your post, but I'm not sure what you're saying: so you don't believe that our deficits are an issue? If yes, how do you reconcile what is happening in Europe with America's finances? You aren't concerned that Treasury bonds will turn into junk bonds? America make not be able to go bankrupt in the sense that they file chapter 13 papers, but she can print money, and our unnaturally low interest can rates rise to their natural levels.

Please explain again why you think this won't happen and/or can be easily fixed.

Sorry, that was me responding to Mr. Lewis.

In response to your ask for an explanation on our knowledge of the coming crisis-- it is fairly straightforward, I believe. We know how many people exist in the country, and thus we know how many people will be seeking entitlements like social security. We can then project (I reference you to the Slay the Beast literature I provided above, which takes its numbers from organizations ranging from the CBO to Treasury to other statistical gatherers) how much money this will cost us in the future, and rightly conclude that we cannot even come close to affording it. This is beyond the issue of debt limits and deficit reductions-- entitlement spending is a mandatory part of the budget and will soon eclipse all of the tax revenue that the US government is capable of bringing in. I am no where near an expert on the issue, but it seems clear enough to a layman like myself to understand that when we have more people claiming on Social Security, Medicare, and Medicaid than we have paying into such entitlement programs, we are going to have a bit of a problem. We will become as insolvent as Greece and Ireland, with the terrible difference that no country or institution on Earth will have anywhere near enough money to "bail out" the USA as the Europeans and IMF are bailing out their failing economies.

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