the federal debt: how bad is it? and deficits november...1. the us government debt is not now at...
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The Federal Debt: How Bad is It?
Douglas J. Young
Professor Emeritus
Montana State University
November, 2015
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The Federal Debt
1. Definitions and History
2. How Much is “Too Much?”
3. The Long Term Outlook
4. What Can be Done
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1. Definitions
• Deficit = Outlays – Receipts
– Usually, per year
– “The Federal Government’s Deficit in 2015 was $439 Billion.”
• Debt = Accumulation over time of Deficits less Surpluses
– At a point in time
– “The Federal Government’s Debt on September 30, 2015 was $18.2 Trillion.”
3http://www.treasurydirect.gov/govt/reports/pd/mspd/2015/opds092015.pdf
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0%
5%
10%
15%
20%
25%
30%
1980 1985 1990 1995 2000 2005 2010 2015
Perc
en
t o
f G
DP
Federal Receipts and Outlays
Receipts Outlays
ERP 2014 Table B-19(78)
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The Debt – How Big is It?
• Federal Debt $18.2 Trillion (9/30/15)
• Non-Financial Corporate Business (6/30/15)
– Debt = $16.6 Trillion
– Assets = $38.1 Trillion
• Households + Nonprofit Sector (6/30/15)
– Debt = $14.3 Trillion
– Assets = $99.9 Trillion
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US Department of Treasury and Federal Reserve
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Ownership of Federal DebtTrillions of Dollars – June 30, 2015
7US Treasury Bulletin September, 2015
$5.0
$2.8
$4.2
$6.2
Agencies andTrustsFederalReserveDomestic
Foreign
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Federal DebtAs a % of Income (GDP)
0%
20%
40%
60%
80%
100%
120%
140%
1940 1950 1960 1970 1980 1990 2000 2010
Perc
en
t o
f G
DP
ERP 2014 (and earlier) Table B-19 (78)
Total
Held by Public
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2. How Much Debt is “Too Much?”
• When lenders worry that the country won’t be willing and/or able to pay it back, and as a result …
• Interest rates rise to compensate lenders for:
– Default Risk and/or
– Inflation Risk9
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When Lenders Lose Faith …
29.9%
12.3%
7.5%5.8% 6.1%
1.4% 1.7%
0%
5%
10%
15%
20%
25%
30%
35%
Greece Portugal Ireland Italy Spain Germany USA
10 Year Bond Yields (%)May 26, 2012
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When Lenders Lose Faith … Update
29.9%
12.3%
7.5%5.8% 6.1%
1.4% 1.7%
7.0%
2.5%1.0% 1.5% 1.9%
0.5%2.3%
0%
5%
10%
15%
20%
25%
30%
35%
Greece Portugal Ireland Italy Spain Germany USA
10 Year Bond Yields (%)
26-May-12 21-Nov-15
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US Interest Rates Haven’t Risen (Yet)
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As of June 1, 2015…
• The US Government Debt is NOT “Too Much” in the sense that it Threatens the Economic and Financial System
• But Neither Debt nor Deficits, as Conventionally Measured, Include “Promises” Made to Future Generations
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Federal Debt Held by the Public
CBO
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Why: Health, Social Security, Interest
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Why?
1. Aging Population: Larger percentage on Social Security and Medicare, and Older Populations have Higher Health Care Costs
2. “Excess Cost Growth:” Health Care Costs per Beneficiary Grow Faster than GDP per Person
3. ACA: Expansion of Medicaid and Subsidies
CBO: The 2014 Long Term Budget Outlook
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4. What Can be Done?
• Cut Spending (from what it would otherwise be)
–Health Care
– Social Security
–Other (Discretionary) Spending
• Raise Revenues
– Tax Reform
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6
8
10
12
14
16
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1970 1975 1980 1985 1990 1995 2000 2005 2010
Perc
ent
of
GD
PHealth Expenditure
Percent of IncomeCanada
Germany
Japan
Norway
United Kingdom
United States
OECD 2014
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Why is US Health Spending High?
1. Unhealthy Behaviors
2. Higher Prices
a. Hospitals
b. Salaries
c. Pharmaceuticals
3. Administration
4. Limited Incentives for Reduced Cost and/or Higher Quality
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Federal Health Care
• Reduce Fraud
• Legal (Malpractice) Reform
• Require Minimum Deductibles and Cost-sharing in Medicare Supplements
• Block grants to states for Medicaid
• Accountable Care Organizations
– Salary (v. Fee for Service)
–Coordinated (v. Fragmented) Care23
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CBO, Long Term Projection for Social Security, Dec 2014
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Social Security
• “Freeze” benefits (adjusted for inflation)
• Gradually increase early and full retirement ages (more)
• Increase taxable earnings to cover more earnings (86% covered today)
• Use the “chained” CPI for inflation
• Cover all new government workers
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Tax Reform-1Lower tax rates and broaden the base
1. High tax rates distort incentives to work, save and invest
2. Because of deductions and exclusions, taxable income is only one-half of personal income
=>
3. The same amount of revenue (or more) can be raised with lower tax rates and fewer distortions, if the tax base is broadened.
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Tax Reform – 2Reduce Tax Rates
• Reduce the top personal rate from 39.6% to 23-29%
• Repeal the Alternative Minimum Tax
• Repeal the phase out of deductions and exemptions
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Tax Reform – 3Broaden the Base
• Tax capital gains (indexed for inflation) and dividends as ordinary income
• Eliminate itemized deductions
• 12% tax credit for mortgage interest on principal residence (capped)
• 12% tax credit on charitable donations > 2% of AGI
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Tax Reform – 4Broaden the Base (con’t.)
• Cap exclusion of employer-provided health insurance
• Tax interest on new S&L bonds
• Cap exclusion for contributions to retirement accounts at $20,000 or 20% of income
• Eliminate 150 other tax expenditures
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Summary
1. The US government debt is not now at dangerous levels
2. A continuation of current policies for several decades is very dangerous
3. Solutions do exist
4. Reform is (Politically) Possible: 1986 Tax Reform, 1993 Budget Compromise, 1996 Welfare Reform
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More Information
Congressional Budget Office
Long Term Budget Outlook
Choices for Deficit Reduction
http://www.cbo.gov
National Commission on Fiscal Responsibility and Reform (2010)
http://www.fiscalcommission.gov
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QUESTIONS?