Government Underground

Below is a link to a report that says 32 states have borrowed from the federal government to make unemployment payments. Following are some initial impressions that only an actuary (or other number oriented, critically thinking persons) would note:

Twelve of these states have borrowed $1 billion or more. 11 out of those 12 states are “blue states” – CA, FL, IL, IN, MI, NJ, NY, NC, OH, PA, WI. Only one of those 12 states is a “red state” – Texas.

Out of the $37.8 billion that all of the states have borrowed to cover unemployment in total, 87% of that debt has been borrowed by “blue states” and 13% has been borrowed by “red states”.

BHO’s “home state” (whatever that means these days, but I mean it here as a former U.S. Senator from IL who helped create the mess we’re in) Illinois came in 6th on the list at $2.2 billion, behind such progressive states as CA, MI, NY, PA and OH (#’s 1-5).

If you take the total amount of borrowings for each blue state and divide it by their aggregate populations, you’ll find that “blue states” have borrowed $172.47 per capita. If you do the same for the “red states”, you’ll find that “red states” have borrowed $70.62 per capita.

These progressives really know how to get IT done. The questions that the sheeple have to wake up to are “What exactly is IT?” and “When are we gonna stop them?”

http://www.economicpolicyjournal.com/2010/05/32-states-have-borrowed-from-treasury.html

As MediaNews Group Inc., the holding company for the Denver Post and other newspapers, fights for survival through a Chapter 11 bankruptcy filing, alternative competitive media outlets continue to gain traction. While there are certainly many factors that are driving the demise of many newspapers, like plunging print advertising revenue, etc., one of the factors that the Denver Post seems to fail to recognize is that a poor product will not win votes, as counted by the dollars spent for subscriptions, advertising, etc.

When someone wants to find out the pro’s and con’s of an issue, what is the first avenue that comes to mind? The internet. Sadly, the Post is not even a serious consideration for critical thinkers.  A perfect example of why this is the case sits on the Opinion Page, 11B, of the May 18 edition of the Post. The Point/Counterpoint asks the question “Should people who work past retirement age be exempted from Social Security taxes?” I wish that I could say that both sides made a rational argument for their position that resulted in constructive dialogue. No such luck. The Post’s inability to find competent fact-based reporting and the construction of logical editorial arguments points to either a dearth of said writing or a lack of ability on the Post’s part to identify said writing. Neither scenario bodes well for the Post.

Wayne Madsen’s class-warfare attack on seniors who work is as stunning in its  vitriol as it is in its undocumented, false assertions. Madsen asserts that “a vast majority” of the seniors who work are “comfortably upper-middle class – not only owning their homes, but often a second one on a golf course or near the beach.” He also states that their stock portfolios far surpass the lifetime savings of most Americans and that more than half drive expensive foreign cars.

Anyone who is objective can easily do a modest amount of research and find the facts on the demography of workers over age 60. For example, according to a 2006 study by the MetLife Mature Market Institute, over 60% of those working in the 60-65 age group are doing so because they need income to live on. Almost 40% of workers in the 65-70 age group work because they need income to live on. This was in 2006. Things are more challenging today than in 2006. A 2008 survey by MetLife Mature Market Institute found that one in four people over the age of 62 wouldn’t retire as expected due to the economy (that’s in 2008, before things got even worse).

http://www.metlife.com/mmi/research/index.html

RetirementJobs.com, the number one job site for career seekers over the age of 50, as measured by traffic, saw its visitor count quadruple from August 2008 to February 2009. According to Bob Skladany, vice president and chief career counselor for RetirementJobs.com, “people who are retired and had no expectation of working again appear to be returning to the work force or job search in incredibly large numbers.” Of those surveyed, over 60% said that they were looking for full time work as opposed to 25% prior to the summer of 2008.

http://www.foxbusiness.com/story/personal-finance/lifestyle-money/career-center/senior-citizens-look-enter-work-force/

Madsen’s ad hominem attack on this fictitious majority group of rich senior workers includes calling them egotistic, “oh-so-comfortable”, “the geriatric ungrateful”, “latter-day Midas”, and “super-rich seniors.”

Madsen’s straw-man argument using Chevy Chase, Maryland, is incredibly off the mark.  A simple online look at the demographics of Chevy Chase, Maryland (according to the 2000 U.S. census) reveals the population to be 2,726 people with a median age of 43.1. Madsen’s excoriation of this “posh suburb” as “the crown jewel of conspicuous self-aggrandizement by super-rich seniors” is a flat out false accusation.

Another of Madsen’s straw-man arguments posits that working seniors should be happy to pay an extra 20-25 percent in taxes because they would still remain “far wealthier than their counterparts in any other country on earth.” By this logic, Mr. Madsen should be voluntarily paying an extra 20-25 percent in taxes because he himself would also still be far wealthier than his counterparts in any country on earth.  In fact, those who live at the poverty line in the U.S. are also among the group who can count themselves as fortunate to be “far wealthier than their counterparts in any other country on earth.” According to 2003 data from the World Bank and CIA Fact Book, the per capita income in the U.S. was $37,500.  The poverty line for the U.S. in 2003 for a family of four was $18,400. The per capita in U.S. dollars of the “middle income” for the entire world is $6,000. Global low income is defined as $2,190.

Finally, Madsen demands that seniors should “give back some of their stockpiled treasures”, participate in “shared sacrifice”, and accept a “blessings-of-liberty surtax” on “their own mini-Fort Knoxes.” Mr. Madsen has zero right to lay claim to the hard won savings and property of others to pass out as he sees fit. This is an outlandish call for a Marxist response to a problem that does not exist. He then has the nerve to tell seniors that this would actually be good for them because, like Scrooge, they might wake up to find the joy in helping the unfortunate among us. Apart from wondering just how much seniors voluntarily give to charity out of their incomes compared to Mr. Madsen, it is insulting to be lectured on virtue in the final paragraph by someone who has spent the entire article hurling false accusations and calling people names.

Most bothersome to me is that the Denver Post continues to print such absolute false, vicious, absurd Op-Ed’s from incredibly out of the mainstream writers and pretend that they are represent a valid argument for the liberal side of the issue. To continually present these absurdly constructed opinions that consist only of ad hominem attacks and straw-man arguments as valid positions does nothing to advance the true dialogue that is needed to address the very real issues that we face today. Does the Post print such drivel as if it represented legitimate policy positions because it lacks the critical thinking to evaluate submitted op-ed articles and pick one that actually makes a good case for its position, or is this simply the best that the Left has to offer?

I read through some of “The Budget and Economic Outlook: Fiscal Years 2010 – 2020″, published by the Congressional Budget Office (CBO) in January 2010, by Doug Elemndorf, Director of the CBO.  Fascinating stuff… really… if you’re into horror stories.

Given all of the recent talk about sovereign debt, potential downgrades of various countries’ credit ratings, etc., I thought I’d take a cursory view of the United States Budget projections with respect to our ability to service our own debt. I have my own theories as to what our current situation is and what our prognosis is going forward (not good), but for this post, I’m going to simply look at one aspect of our current fiscal policy – debt service.

Loosely speaking, your “debt service coverage ratio” measures your ability to make payments on your debt by comparing your payments against your income.  In the classic case, the payments consist of the amortization of both interest and principal.  For example, when someone applies for a mortgage, the bank will typically look at the cost of the principal + interest + taxes and divide that by your income.  They’ll want to see a ratio of less than a certain amount, say 32% or whatever.  That ratio will help determine if you are making enough money to afford the particular loan you are trying to qualify for.  Most people who have bought a house should follow that example pretty well, having gone through it.

Thinking that this is a reasonable way to look at finances, I wondered how the federal government’s interest payments compares to its income.  This first graph shows the percentage of the government’s projected income that will go to pay interest from 2010 – 2020 (all data directly from the CBO report). Note that this is interest only and does not include repayment of principal.

It looks like the amount of income that will go to pay interest on our federal debt ranges between 17% and 24%. Now that doesn’t sound anything like Greece, so maybe we’re not in that bad of shape.  But let’s take a look at some of the CBO’s assumptions in this projection:  inflation will never rise above 2.0%, GDP will increase to 5.6%, unemployment will drop to 5.0%, the Ten Year Treasury will only increase from 3.6% to 5.5%, the Bush tax cuts are allowed to expire (taxes are raised), and the Alternative Minimum Tax “fix” is no longer fixed (i.e. AMT taxes hit more people in the middle class than ever.)  In other words, the perfect economy plus some increased taxes.

This is in spite of flooding the market with trillions of dollars in fiat currency during a time of decreasing production (the classic definition of inflation is more money chasing less goods), monetizing a large chunk of the debt, and  continuing to spend more money than the government takes in by an average of $600 billion every year over the next decade (again, according to the CBO).

Call me a chicken-little, doom and gloom actuary, but I don’t think that this makes a lot of sense.  While I hope things go well, let’s do a little sensitivity testing.  What if, due to some of the above mentioned facts, inflation actually goes above 2%? Not an unreasonable question. Or what if, in continuing to sell more Treasuries to pay for our ongoing deficit spending, we have to increase rates more than anticipated to continue to attract buyers? Or what if the Fed needs to raise interest rates more than the modest amount assumed in these projections in order to try to keep inflation down?

All of these sorts of very plausible “what-if’s” would cause rates to increase more than the CBO’s projection. Let’s say that interest rates go up 2% or 4% more than the rosy CBO scenario suggests. What will happen to our “debt service ratio?” Remember the power of compound interest folks and look at the next graph. The red line shows rates up by 2%. The blue line shows rates up by 4%.

Not a pretty picture.  If rates go up 4% more than expected, then the debt service jumps from averaging 20% of revenue to 40% of revenue.  Carefully consider what that means. In order to get that ratio from 40% back down to 20%, the tax revenue would have to be DOUBLED. Tax revenues, to my knowledge, have never been doubled. The other alternative would be that the government would have to cut enough other expenses out of the budget to make room to pay for the additional cost of the interest payments. I have never known the government to implement a 20% across the board cut.  In fact, they’re rioting in Greece, literally burning bodies in the street, due to that country’s austerity plan, whose cuts are not even close to 20%.

If this isn’t enough to make your head explode, consider that raising interest rates causes the cost of capital to go up, plus the aforementioned tax increases cause economic growth to be stunted, and total tax revenues don’t meet the rosy projections in the CBO’s baseline scenario.  For example, due to the recession, federal revenues dropped by 1% from 2007 to 2008. They dropped by 17% from 2008 to 2009. During the previous recession, revenues dropped by 2% in 2001, 7% more in 2002 and an additional 4% in 2003.

What happens if tax revenues fall 10% short of the CBO’s projections in 2010 because a 2% or 4% unanticipated rise in interest rates holds the economy down.  This is not unreasonable. After 2010 I assume that revenues will continue to grow going forward at the CBO’s assumed growth rate.  This is just a one year hiccup. Here’s the result:

Or what happens if the one year hiccup is a 20% shortfall in tax revenues from the CBO’s projections because a 2% or 4% unanticipated rise in interest rates holds the economy down.  Debt service of over 50%, that’s what:

So, according to the CBO’s rosy baseline scenario, we are adding an average of $600bil per year to our debt by spending $600bil per year more than we collect in tax revenue. The graphs above are simple “what-if’s” given some very plausible scenarios. The results would be catastrophic.

Still don’t think that whole Greece thing could happen here?