One interesting aspect of the tough times ahead (i.e., my forecast) concerns the reaction of the American people. We have been warned by so many major leaders and institutions (see this archive) that chanting our 21st century mantra of “it’s not my fault” will be difficult. However I have confidence that we will find a way to shift the blame from ourselves.
For too many Americas being a democracy is compatible with assuming no responsibility. Of course, a tyranny is even more compatible, and we might learn this unless we change our ways.
The warning for this month comes from a senior leader in one of our most powerful financial institutions. His extraordinarily frank warnings conveys the seriousness of his message. It is well-written, has moments of humor, and provides an extraordinarily clear alarm from a officer of the Federal Reserve. It deserves careful study.
“Storms on the Horizon“, Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas, Remarks before the Commonwealth Club of California (28 May 2008) — Excerpts
Doing deficit math is always a sobering exercise. It becomes an outright painful one when you apply your calculator to the long-run fiscal challenge posed by entitlement programs. Were I not a taciturn central banker, I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.
… Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four-over 25 times the average household’s income.
Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68 percent increase in federal income tax revenue-from individual and corporate taxpayers-would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.
Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut-almost eliminated, really-to tackle this problem through discretionary spending.
I hope that gives you some idea of just how large the problem is. And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?
The way we resolve these liabilities-and resolve them we must-will affect our own well-being as well as the prospects of future generations and the global economy. Failing to face up to our responsibility will produce the mother of all financial storms. The warning signals have been flashing for years, but we find it easier to ignore them than to take action. Will we take the painful fiscal steps necessary to prevent the storm by reducing and eventually eliminating our fiscal imbalances? That depends on you.
I mean “you” literally. This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them. You are the ones who let them get away with burdening your children and grandchildren rather than yourselves with the bill for your entitlement programs.
This is just another in a long line of warnings by important people and major institutions (see #3 below). Will we listen to Fisher? There is an election in November. Make sure your voice is heard.
Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
Reference pages about other topics appear on the right side menu bar, including About the FM website page. Esp this page:
Other posts on these things on the FM website:
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A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Well, it’s good that you encourage the public to vote: that has to be the first step. 60% of eligible voters turned out in 2004. Wouldn’t it be great if more than that turned out for 2008? Granted we have more people, but recently, in the country of Bhutan over 70% turned out to vote (“Lost in Democracy“, 22 May 2008) despite their doubts of tranforming into a democracy from a monarchy. I think that the more voices heard, the better chances for change in the country.
However, I concerned. Following this statement: “Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68% increase in federal income tax revenue – from individual and corporate taxpayers – would suffice to fully fund our entitlement programs. Or we could instead divert 68% of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.”
Does America truly want a tax increase and more government programs? Truly it is absurd to call ourselves and free nation when people will beg and plead for the government to take of them. Or have I truly misread the intention?
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Fabius Maimxus replies: (1) I agree, but it goes beyond just voting. Writing letters to the Editor, posting on the web, working for candidates, writing checks. Voting is good, but not sufficient. If the Republic is to survive the stresses I believe lie before us, we need a higher level of citizen involvement.
(2) Fisher is just working out the math on the existing programs. Pay more now, pay more later, or break promises (either through inflation or outright default). There are no other alternatives.
Americans have arranged their lives on the basis of these programs. Most important, the US savings rate has fallen from healthy levels in the early 1980’s to near-zero today — esp. among the middle-income households. To some extent because of government Social Security and Medicare programs. Our choices, our responses to these problems will define America for the 21st Century, imo.
Thiese things are the background to our situation. There are no easy answers.
But, of course, there is no scenario in which the future entitlement programmes ever would be capitalised in such a way. This is always and everywhere a scaremonger’s argument – you never hear of an “unfunded police liability”, do you?
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Fabius Maximus replies: I do not understand what you are saying. This is the arithmetic behind these programs. He sketches out the alternatives, a first step to making choices.
Yes, we do hear of “unfunded police liability”. Police services are expenditures, and can be met by some combination of paying now and paying later. Muncipalities have funded police services by lavish promises of retirement benefits (retire early at a high % of final pay, with great medical plans). And yes, they have not fully funded those. This is already a concern, and will grow more so as people realize the extent of the problem.
As these NY Times stories show, this problem has been visible for years. As the bankruptcy of Vallejo California shows, the boomers have begun to retire and demand payment of these promises.
“The Next Retirement Time Bomb” (11 December 2005)
“Public Pension Plans Face Billions in Shortages” (8 August 2006)
Interesting article, but his conclusion is a little disingenuous. It’s not like pro-fiscal responsibility and realistic candidates have been running for election and losing, candidates uniformly refuse to discuss or embrace the issue. How are we supposed to effect change when no candidates will do so. And don’t tell me to run for office, we’re all aware at how the deck is stacked against anyone without money and political connections.
And furthermore, assume a few candidates were elected. They will make no difference in our elected bodies.
This issue will be ignored for as long as possible, and it is far too much to hope that someone will take any initiative before their election cycle will encompass the disaster.
Fabius Maximus replies: He works for us (more or less), so his role — responsibility — is to warn us. As citizens in a democratic republic, individual citizens have the responsibility to act. If we do not act, then we collectively bear the consequences. Complaining that the “deck is stacked” against us is so 21st century American. Who cares about such things, let alone considers such excuses sufficent reason not to try? Preemptive surrender is guaranteed failure, always.
That we will act is not too much to hope for! It might be unrealistic to expect, but that is a different type of discussion. I will leave calculating the odds to bookies.
This has been the goal of conservatives for a long time — to delegitimize the concept of social democracy and reduce federal entitlements. Along with that will come reduced federal income taxes, which benefit the affluent and are meaningless to the poor.
14 years ago, or so, Chairman Volker persuaded Congress to increase the Social Security tax in order to guarantee a social security surplus in perpetuity. All that surplus was borrowed to fund ordinary government operations, in return for Treasury bills, which are now potentially worthless, and which President GW Bush recently hinted might not be honored at all.
Volker’s math at the time was similarly unimpeachable, and yet his promise of a guaranteed surplus was hollow.
US Tax rates have already been lowered drastically for certain kinds of individual income, and for corporations as a class. There is plenty of room and justification to restore them to previoius levels. All the european countries have higher tax rates than ours, and much higher levels of social support and standards of living (including much higher levels of health care.)
You talk about democracy, Fabius, but the program suggested here is one that is profoundly undemocratic in that it privileges a minority while pushing the majority further into third-world conditions of living.
Fabius Maximus replies: Much interesting material packed into your comment! Here are some thoughts. I apologize for the length of the reply!
(1) Re your opening. I believe this is too harsh, in the partisan spirit that “my political opponents must be demons in human form.” I doubt that many conservatives wish to “delegitimize social democracy.” In fact, that is a common accusation they make against liberals. There is truth on both sides, as collectivists and totalitarians are found on both ends of the spectrum.
(2) Many conservatives believe most entitlement spending damages both the Republic and individuals who receive it. There is much evidence that this is so, in some circumstances. Social security reduces people’s incentive to save. As Patrick Monahan forecast, the Aid for Dependent Children did terrible damage to the family structure of Black families. If our Republic goes bankrupt, certain a possible scenario, they will have been proven correct.
(3) Before folks jump on your for “in return for Treasury bills, which are now potentially worthless”, let me explain. They are worthless. Not because the US government will default, not paying its debt, but because any IOU is worthless if made out to the issuer.
Write yourself an IOU for a million dollars. Are you richer? Social security is a liability of the Federal government – a contingent one, which can be changed by legislation (this has been tested in court). It cannot be secured by IOU’s from the same government. As you correctly note, the money was spent – replaced in the till by IOU’s (government bonds). It’s gone, like the snows of yesterday.
(3) “{Volker’} his promise of a guaranteed surplus was hollow.”
Successive Congress and Presidents spent the money, which was not his fault.
(4) “US Tax rates have already been lowered drastically”
Drastically is a bit of misleading, as tax revenue dollars from the rich are up substantially.
(5) “All the european countries … standards of living…”
Some citations would be appreciated. By the usual standards of income and per capita GDP that is not so. Some smaller EU nations look good, but that’s like saying Greenwich CN is better run than the US because its income and GDP per capita are higher. The proper comparison to the US is the EU, as both are aprox the same population and GDP.
(6) “the program suggested here is one that is profoundly undemocratic in that it privileges a minority”
What program?
“… Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability…”
Washington could then begin construction of our first Battlestar, and search Mars for weapons of mass destruction.
Oh, the election is still on? Does that mean the “Catastrophic Emergency” has been cancelled?
Fabius Maximus replies: (1) I like the first idea!
(2) How many times since 1972 have I been told, by serious folks, that President Nixon/Reagan/Bush would cancel the next election! I believe Mikyo refers to the following:
National Security and Homeland Security Presidential Directive
NATIONAL SECURITY PRESIDENTIAL DIRECTIVE/NSPD 51
HOMELAND SECURITY PRESIDENTIAL DIRECTIVE/HSPD-20
Subject: National Continuity Policy
May 9, 2007
Purpose
(1) This directive establishes a comprehensive national policy on the continuity of Federal Government structures and operations and a single National Continuity Coordinator responsible for coordinating the development and implementation of Federal continuity policies. This policy establishes “National Essential Functions,” prescribes continuity requirements for all executive departments and agencies, and provides guidance for State, local, territorial, and tribal governments, and private sector organizations in order to ensure a comprehensive and integrated national continuity program that will enhance the credibility of our national security posture and enable a more rapid and effective response to and recovery from a national emergency. …
Pity the poor US government. If they plan for extreme emergencies, they fuel whacko conspiracy theories. If they fail to plan for extreme outcomes, like Katrina and Y2K and terror strikes — then they are incompetent when one happens.
Ash wrote: “Well, it’s good that you encourage the public to vote: that has to be the first step. 60% of eligible voters turned out in 2004. Wouldn’t it be great if more than that turned out for 2008? ”
Apparently 40% of US voters think that their vote either makes a difference or is owed to the state.
I think the voters would make a stronger statement if 99% of them could agree to stay home until the jiggery-pokery of the election process had been abolished. A vote of no-confidence in the government would be inferred by such a voting strike, even though the American system does not formally recognize voter refusal as an effective vote of no-confidence. This tactic is often advocated by anarchists, which means that it is not likely to make dramatic advances into the currently compliant 40%. On the flip side, 60% of US voters either believe in anarchy or can’t be bothered to demonstrate that they don’t believe in it. The ideological former group is presumably much smaller than the apathetic latter group.
Fabius Maximus replies: Future historians may conclude that the special genius of the 21st century American may be to develop high-sounding justifications for doing nothing — and shifting blame for the resulting outcomes.
I urge you to get out there and write — organize — get involved in the political mechanics — write checks to candidates you like — and vote.
One or two examples of better standards of living in european countries: Germans are entitled to something like five weeks of paid vacation a year. French workers work only 35 hours a week. Brits have free medical care, and French have that and more (see M. Moore’s Sicko.)
Admittedly the social democracies are having trouble paying for these programs lately.
Social security discourages savings? Any family of four making less than $80,000 a year isnt going to have much left over to save. And anyway, social security IS a savings program, just like an IRA or 401K is.
I’ll bet many of your readers are glad that good ol Mom and Dad have some social security to keep them from having to move back in with their children.
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Fabius Maximus replies: You make some interesting points! A few thoughts in reply.
(1) Many (all?) European nations have shorter average workweeks. That is not by itself a sign of a better standard of living, or we would consider part-time workers to be better off than full-time workers.
(2) On the other hand, by most monetary standards most Americans (or average Americans) have a much higher standard of living than most folks in the EU. Money is not everything, but it is easily measured and compared.
(3) “free medical care, and French have that and more.” You must be kidding — where do you think the money comes from? It is paid for by their taxes (VAT/sales tax, income taxes, wealth taxes).
(4) Social security is both in law and fact a tax program loosely coupled to an entitlement program. Loosely in that there is not connection between the funds paid and the benefits received, nor are the benefits guaranteed in any way. It is not a savings program. First, there is no connection between an individual’s payments and receipts. Second, because the money is immediately spent once received by the government– neither saved nor invested.
(5) As for you last point, that is true. Social security has transformed the elderly from the poorest age group to the “richest.” Unfortunately it is functionally a ponzi scheme, and as such will likely come to a bad end. But it will be great while it lasts!
Fabius,
The key here is leadership. The people are to blame. They keep electing “cheerleaders,” so that is what they will continue to hear, that we can defer this problem forever. We need a line of leaders that can state that we have to start bearing responsibility for everything we do today, and not tomorrow. Our Republic was strongest when we had a thriving middle class (turn of the 20th century to the 1950s), that was not dependent on the government for anything (except defense).
We must return to a similiar era or perish (meaning we need a strong and vibrant middle class and non-dependent lower class, and a selfless serving culture).
I have hope. I for one have seen good in rising gasoline prices. People all around me are adapting, taking more mass transit, walking more, and planning in more detail their days (when do I need to drive vice drive anytime for anything). I just pray that the gas prices rise at a rate slowly now and before peak oil, so we have the time to make the adjustments as a culture. If gas prices continue to slowly rise, we may force some of the cheerleaders out and some true leaders in. My wife and I are making it our challenge to use our cars as little as possible.
As far as the financial crisis, that is a big one. One of our downfalls, of our capitalist societies, is it is focused on the short-term vice long term. Additionally, several complex events, such as the food revolution, cheap gasoline, government programs and television, that made our lives enjoyable for the short term, also made us less responsible for the long term. Leaders have to focus on this first to fix the rest, and that is going to be hard. You saw what happened to Obama when he stated about a month ago that our nation uses too much oil, etc…he was attacked by everyone that “don’t tell me how to live my life” crowd.
Keep up the good work. You are a voice in the wilderness.
Don
Fabius Maximus replies: Well expressed! I agree on all points!