CBO’s Attempt at Humor?

If you need a good laugh, I recommend reading the CBO’s Budget and Economic Outlook.  (Here’s the link.) It was just released this past week.  Reading the absurd assumptions in this report brings back many fond memories, like when I met Jenny and told her about the fabulous / easy life she would have with me.

Take a look at this chart which shows the CBO’s forecast of future tax revenue and expenditures — and how our deficit will shrink.  I actually don’t blame the CBO, as they need to rely on current law in making their projections. I blame the politicians.


Notice how revenues will reach 20% of GDP in four years and will reach 21% after that!  Awesome.  The only problem is that revenues have averaged 18% over the long-term and only reached the 21% range when executives were paying taxes on stock options from the great tech bubble.

The CBO describes the absurd assumptions that they had to rely on:

1.     Sharp reductions in payments to physicians under Medicare – starting at the end of 2011

2.     At the end of 2011, all of the following will expire: unemployment compensation extensions, the one-year reduction in payroll taxes and the two-year extension of provisions designed to limit the reach of the AMT

3.     At the end of 2012, the following will expire: the lower tax rates (and the expanded credits and deductions) from the 2001 and 2003 tax acts

4.     Discretionary spending will increase with inflation, rather than the higher rate seen over the dozen years leading up to the recession

If you want a more realistic perspective, go back to the CBO’s Long-Term Budget Outlook that they published six months ago.  They show what will happen with our debt under the assumptions that are forced upon them and under the alternative (more realistic) scenario.


In case it helps, I’ve also included the CBO’s projections for my hair under my assumptions:

full head

Unfortunately, the CBO has also published pictures of their more realistic, alternative scenario:


The bottom line is that we’ll never address a problem that we “assume” we’re not going to have.  If we had been honest from the beginning, we would have measured our annual deficit on an accrual basis, rather than a cash basis — and we would have recognized our problem much earlier. Instead, we used the cash basis, counting our Social Security tax revenue as income that could be used to balance our budget each year. Now, we assume that the tax revenue fairy will make it all better.

Bankruptcy Court for States?

Recently, there’s been talk about changing the law to allow states to file for bankruptcy.  Under current law, cities and towns are able to file for bankruptcy, but states can’t.

There have been three recent times when this issue was mentioned:

1. Newt Gingrich delivered a speech in November in which he said, “I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy.”

2. A Penn Law School professor wrote an article arguing that a law could be passed allowing for state bankruptcy.

3. A New York Times article last week said that Republican legislators were considering a law to allow states to file for bankruptcy.

Here’s a non-exhaustive list of the key issues:

1. Some states have huge deficits.  California’s deficit is approximately $25 billion.  Illinois has a $15 billion deficit.  Texas has a two-year deficit of approximately $26 billion.

2. States have structural budget problems (unfunded pension liabilities) and this may mean diverting money from essential public services.

3. One major reason why states aren’t allowed to file bankruptcy is that states are sovereign.  Therefore, it is not possible to have a bankruptcy judge imposing terms upon them.  As a result, any new law will preclude any person or entity from forcing a state into bankruptcy.  In bankruptcy, a judge will be precluded from forcing a state to change their tax policy or their spending.

4. If there is no bankruptcy, states will eventually seek a bailout.  With an upcoming election, it may be very appealing to bailout California, Illinois and New York.  Obviously, a bailout will transfer wealth from all US taxpayers to a particular state.

5. The threat of bankruptcy could give states leverage with unions.

6. Bankruptcy could mean altering contractual obligations to retirees and general obligation bondholders.  Both could end up as unsecured creditors.  Bankruptcy would be a wealth transfer from bondholders and state employees to taxpayers.

7. If Congress actually even talks about a bill like this, it could become very difficult for states to raise money.

8. The default / bankruptcy premium could become significant in the muni market.  There have already been $25 billion of outflows from muni funds in the past two months.  (You could argue that this already exists based on credit default swap prices.)

9. Politicians (governors) may appreciate the ability to shift the blame for austerity measures to a bankruptcy judge.

Let me be clear…while I work for the state of Texas, I do NOT have a pension – so I’m not writing about myself.  I have a 403 plan (just like a 401(k)).

Again, there’s no easy solution to this. There’s been some research that argues that public employees are overpaid.  Regardless of whether the research is right or not, we offered these jobs and made these promises.  I think that the vitriol directed at state employees is wrong.  Personally, I don’t want to work in a prison, I don’t want to work the night shift as a Police Officer.  Actually, I don’t even want to work in a public high school or grade school.  I wouldn’t trade with any of these people and I don’t think most of you would want to trade either.  It’s way too easy to speak badly about these employees and it’s just not right.  Most importantly, it’s not going to solve the problem.

The United States of Enron

I’m writing today with some good news and some bad news.  The good news is that we’ve lowered our unfunded liabilities. This is the money that we should have (today’s present value of our future liabilities), but we don’t have.  Last year, we were underfunded by $52 trillion.  As you will see below, we’ve reduced that to $43 trillion.  Hooray for us!


Now, on to the bad news.  This reduction is a total fraud.  When the Trustees calculate the unfunded liabilities, they have to base this on current existing laws.  These laws resulted in the unfunded liability of Medicare dropping by $15 trillion.  You can see this below.  (Note: Medicare liabilities dropped by $15 trillion but other actuarial amounts increased by $6 trillion; therefore, the total liability dropped by $9 trillion.)


Here are a few assumptions (based on the news laws) which allowed us to drop our Medicare liability by $15 trillion:
1.     We will reduce our payments to Medicare providers by 30% within the next three years. We have never been able to do anything like this and I would argue that we never will be able to do this.
2.     Due to the Affordable Care Act, there are assumptions that “aggressive research and development has the potential to reduce Medicare costs in the future.”  This may well happen, but it’s speculative at best.  It certainly hasn’t happened in the past.  The reality is that research often results in technology which allows us to live longer and cost us more.
3.     Physicians must reduce the cost of medical services based on the productivity of the overall economy.  Unfortunately, as the government report admits, medical care is labor intensive and has not been able to increase productivity at the same rate as the overall economy.
As a recent op-ed piece argued in The Wall Street Journal, do you really believe that we can insure the uninsured and this will lower our debt and deficit?  It doesn’t make much sense.  Don’t get me wrong…I want everyone to have access to health care and I’m willing to help pay for it.  I’m personally willing to have less so that others can have more.  I know that many (maybe most?) people don’t agree with me.  Regardless, if we’re going to do this, I want to know the real cost and I want a plan concerning how we’re going to pay for it.  I don’t want to be told that it’s not only free…it will save me money!

If these kinds of assumptions are going to be the basis of our estimates, I would suggest that we rename our country the United States of Enron and we elect Bernie Madoff the president.  The real problem is that if we’re going to lie about our problems, we’re never going to solve them.

Is The Unemployment Rate Really 9.4%?

First, a public service announcement…if you are either a UT alumni or a currently enrolled UT student, I am doing a FREE webinar on Tuesday at noon CST.  The topic is “Thoughts From an Extreme Moderate.”  I will discuss some of the current financial issues as well as the extremism that we see in US politics.  You can sign up at this link.

I have several presentations during the next couple of weeks.  As a result, I plan on posting several simple, short blogs each week.

We’ve all heard the good and bad numbers of the employment situation.  The good news is that the unemployment rate dropped to 9.4%.  We’ve created approximately 1.2 million jobs this past year according to the household survey.  The first time claims for unemployment insurance have dropped and are now close to 400,000.   Many people believe that we’re going to eventually have an explosive month (where several hundred thousand jobs are created).  The bad news is that we’re creating jobs at a very slow rate.  We still have close to 14.5 million unemployed people.  On Friday, Fed Chairman Bernanke repeated the idea that it could take four to five years for the job market to normalize.  The more inclusive unemployment rate (counting the unemployed, people who have accepted part-time jobs even though they want full-time work and people who are too discouraged to look for work) is 16.7% (one-in-six Americans).

I think that the most important number to examine is the participation rate (the percentage of the population which is part of the labor force).  Below, I have plotted the participation rate (simply measuring December of each year) since December 1997.  The participation rate obviously drops during recessions – as people drop out (they don’t describe themselves as looking for a job).  Yet, it’s probably reasonable to assume that the participation rate will return to the 66% – 67% range (unless the Fed continues to inflate the stock market and we’re all able to retire early…).

If the participation rate were simply 66%, our unemployment rate would be 11.7%.  If you really want to compare our unemployment problem to normal times (not to other bad times), this is probably a more reasonable estimate of our unemployment rate.

If the participation rate were 67%, our unemployment rate would be 13%.

Labor Participation rate

One final thought for the day…QUACK QUACK…BEAT auburn!  If I believed that Cam Newton didn’t know what his father was doing, I’d also believe in the Social Security trust fund.


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