Monday, April 16, 2012

US Fiscal Policy

We have the best government money can buy. New Jersey Governor Chris Christie explained it all rather nicely last Tuesday in a speech he delivered at the George W. Bush Institute Conference on Taxes and Economic Growth in Manhattan. He observed that politicians have a great need to be loved: “That’s why we run up these deficits we run up. That’s why we can’t say no to anything, because we care too much about being loved.” In other words, politicians show their love for the voters by running huge deficits and the voters return the love by voting for them.

The result, according to the Governor, has been a “paternalistic entitlement society” with “a bunch of people sitting on a couch, waiting for their next government check.” He thinks this is wrong because it “will not just bankrupt us financially, it will bankrupt us morally…” He is right, of course.

Our constitutional system of checks and balances was supposed to guard against such fiscal recklessness. However, the Founders forgot to include a balanced budget requirement in our founding document. Without it, there was nothing to check and balance the spending excesses of our politicians once they realized that they could finance the resulting deficits in the credit markets. What are the odds of Congress passing a balanced budget amendment? Less than zero given that Congress can’t agree on any of the many deficit reduction plans that have been proposed recently. Here are some of the unsettling impacts on our nation's financial situation so far:

(1) The federal deficit over the past three fiscal years through September 2011 totaled $4.0 trillion, averaging $1.3 trillion per year. This fiscal year, which is the third full year of the economic recovery, the deficit is likely to be around $1.0 trillion again.

(2) Total public debt outstanding, including nonmarketable securities held by federal trust funds, rose to a record $15.6 trillion during March. It’s up $1.3 trillion over the past 12 months and $6.1 trillion over the past four years.

(3) Dividing all this debt by the labor force in the US shows that American workers each owe a record $100,720. That’s double what they owed during 2004.

(4) The Federal Reserve has enabled this fiscal recklessness by pegging the federal funds rate near zero and buying lots of US Treasuries. That’s emasculated the Bond Vigilantes. The Fed’s holdings of US Treasuries rose $1.1 trillion over the past four years through the week of April 4.

(5) The social welfare state in America is set to grow faster than the economy as the Baby Boomers retire. From 1993 through 2010, outlays per beneficiary for Social Security and Medicare more than doubled from $10,459 to $22,319. Over this same period, total wages and salaries in compensation and nominal GDP did about the same. Because Americans are living longer, the number of Social Security beneficiaries rose 88% over this period, and will increase at a faster rate as the Baby Boomers now start to retire.

(6) The number of people claiming disability has soared. It rose to a record 8.7 million during March, doubling since February 1997. Over this period, their numbers have increased by 4.3 million. This helps to explain some of the drop in the labor force participation rate, which fell from 66.9% to 63.8% over this period.

Today’s Morning Briefing: Here We Go Again? (1) Buying time and running out of it. (2) Pass the sangria. (3) Four plausible scenarios for stocks. (4) In the first, Europe has a meltdown, the US falls off a fiscal cliff, and Iran gets bombed. (5) In the second, central banks pour more Kool Aid. (6) In the third, the US shines. (7) In the fourth, sangria makes everything better. (8) Asset allocation: Going sector-neutral in US. Still underweighting European stocks, especially banks. (9) So what is the US economy doing? (10) Globalization for bulls. (More for subscribers.)

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