As Easy As Falling Off A Cliff: Part II

(This blog post began here.)

The second speaker of the day was Matt Slaughter.  He’s Associate Dean of the Tuck MBA program, as well as professor of management there, and economic adviser to the Congressional Budget Office, Senior Fellow at the Council on Foreign Relations, member of the U.S. State Dept’s Advisory Committee on Tax Policy Reform, etc.  More here.

His talk was titled “Is the U.S. Bankrupt? Or ‘Merely’ Dysfunctional.”

The more sobering of the two talks, certainly.

He outlined his talk:
— America’s Fiscal Past, Present and Future
— So, What Do We Do? – Economics
— So, What Do We Do? – Politics and Leadership

Past, Present, Future


General fiscal stability since the end of WWII. A constant outcome in terms of the size of the federal government, no matter what party was president or in control of Congress, no matter what business cycle we were in. In all these years, we were a “18% tax revenue as % of GDP and a 20% spent at % GDP” nation. So we ran at a 2% deficit most of those years.


From 2009-2011, the U.S. ran deficits of 9-10% of GDP per year. Tax revenue is now 15% of GDP, while spending is 25% of GDP. This is historic. Partly caused by the world financial crisis, and the low savings rate in the U.S., which means that much of the run-up to this debt has been funded by foreign interests. Just about half our debt is now owned by foreign private and public interests, for the first time since the Revolutionary War. If international creditors get worried about our ability to repay the debt, we will be in crisis, and it can happen overnight. If they don’t buy our debt at auction (the usual way debt is sold and bought), then either our government will need to make more money or we will need to appeal to other countries’ governments to buy it. Neither is a good scenario.

FY2011 U.S. Revenue = 2.3 trillion
from individual income tax … 1.09 trilion
from FICA tax … 819 billion
from corporate taxes … 181 billion
from other taxes … 211 billion

FY2011 U.S. Spending = 3.6 trillion
Medicare, Medicaid, Social Security … 1.624 trillion
Discretionary spending … 1.223 trillion (800 billion is Defense)
Net Interest payments … 454 billion

Note that non-defense discretionary spending represents 10% of all U.S. federal spending.

Overall, the federal tax code is quite progressive; that is, the five quintiles of taxation increase as income increases. Those at very top levels, though (whose income is alost all from capital and very little from labor), actually pay at a lower tax rate than most people, though. 45% of all taxpayers pay no income taxes at all.

FICA taxes are regressive, at 15.3% on only the first $110 in income. Excise taxes are also regressive.


Retirement of Baby Boomers (born 1946- 1964) will lead to two major and significant problems:

1. Significant increase in entitlements (Social Security, Medicare)

2. Significant increase in per capita health care spending. Healthcare spending has increased in the last 25-30 years much faster than increases in general goods and services.

The Congressional Budget Office sees a dire future without significant changes in government policy. (See handout, 5-page summary of 147-page 2012 Long-Term Budget Outlook pdf, published by CBO June 2012)

Ben Bernacke, chair of the Federal Reserve, says that post-WWII fiscal stability is unsustainable. Entitlements are projected to be 16% of GDP by 2030, which will mean an $11 trillion Social Security shortfall and a $40 trillion MedicareMedicaid shortfall.

It’s both the demographics of aging in this country and the sky-rocketing healthcare costs that are leading us down a dangerous and unsustainable path.

Our choices are three:

1. Massive tax increases

2. Elimination all non-entitlement programs (and Congress can retire)

3. Slashed entitlements

And this is without the current recession; these shortfalls were predicted 20-30 years ago.

If no tax increases, we will be Greece.

Federal Debt Held by the Public, 1912 to 2037

Slaughter showed this chart. The blip up to 100% (debt as percentage of GDP) in 1942-45 was related to WWII. The smaller blip to 50% in 1991-92 was when Reagan increased Defense spending. And the small blip in 2000-2002 was due to greater productivity with the IT revolution.

The CBO predicts that by 2020. debt to GDP will be 100%, and by 2035, it will be 200% and rising, just following the course we’re on now, without recessions, wars, etc.

As reference, at end of FY2011, Greece was at 165.6% debt to GDP. Portugal at 106%, Ireland at 109%, Italy at 121%.  Spain, also considered likely to go under, was only at 67%, and Argentina, the last uncontrolled sovereign default, in 2002, was at 62.5% in the months before they defaulted.

In other words, the U.S. could default at any time. If a nation is perceived as unsound financially, private investors won’t show up to buy debt at debt auctions, which is how countries raise money and stay solvent.

(Japan’s debt to GDP is the highest in the world, at 233%, but the difference is that most of its debt is held by Japanese people, in the form of savings, not by international investors who might stop buying our debt at any time).

What to Do? – Economic

What principles of distributive justice do you think a fair fiscal regime should follow? And how do these principles translate to policies?

Slaughter suggested some principles:

  • Simple – might mean a flat tax, or elimination of deductions
  • Progressive – might mean raising the high-end marginal rates
  • Solve Externalities – i.e., using tax policy to correct imperfect markets, e.g., a carbon tax or increase in the gas tax (gas tax has been $.18/gallon since 1992)
  • Support Growth (labour, investment) – might mean a Value-Added Tax, which all major countries but the US have, to add revenues to the federal government
  • Favour the Young (education, R&D, infrastructure) or the Old (entitlements)?  – might mean cut entitlement spending. [I think investment in better infrastructure, like local and regional public transportation, helps the young and the old]

There is not enough there there to focus on only one or two tax policy items.

To prove this, he gave examples, asking people in the audience to raise their hands if they were willing to do the following, then he gave the 10-year projections for savings:

  • Raise the Medicare eligibility age from 65 to 67?  Savings =  $32 billion
  • Raise the Social Security eligibility age from 67 to 70? Savings = $31 billion
  • Eliminate the mortgage deduction? Savings = $75 billion
  • Eliminate deductibility of state and local taxes? Savings = $107 billion

All this adds up to $245 billion, not even a drop in the bucket towards what we need. Yet NO politician is even campaigning on this minimal platform.

Looking at raising taxes on household earners of $250K or more, the story is the same. Roughly 2.5% of households earn $250K or more. Their total adjusted gross incomes are about $1.92 trillion, with taxable income of $1.62 trillion, with taxes paid of $43 billion. Their after-tax income still available to be taxed would be about $1.19 trillion. With a 4% increase in taxation per year, we might get another $50 billion out of them. The deficit last year was $1.3 trillion.

Slaughter’s point is not that we shouldn’t raise taxes on households making more than $250K; it’s that we have to do that and so much more, and we can’t even get off this tiny issue, this drop in the bucket, politically, so there is not much hope.

What to Do? -Politics and Leadership

In 2008, with the failures of AIG Lehman Brothers, we were on the cusp of a worldwide Depression. Bernacke and Paulson asked for a massive fiscal infusion. As the House narrowly voted down TARP (vote was 205-228) on 29 Sept, the world watched the voting on CSPAN and other up-to-the-minute news sources; the Dow Jones lost 770 points in 90 minutes and eliminated trillions of dollars in market value, when investors around the world realised that the U.S. could not come together to do what needed to be done in a crisis.

The future depends on what we in the U.S. do about tax policy, and on whether the Peoples Bank of China (India, Brazil) will buy our debt. Not since the Revolutionary War has the U.S. been so indebted to and reliant on other nations for our fiscal future.

Crises, by their nature, happen when we don’t expect them. They happen overnight, when there is a lack of confidence in the capacity of leaders to find solutions.

Slaughter ended his talk by telling us that he and his wife pay additional taxes into the U.S. Treasury and challenging us to do the same. (Here’s the link to do it.) He believe that paying taxes is a noble action, a shared engagement in the civic culture.


Tim Dickinson (the first speaker) briefly alluded to other countries’ better bang for the buck when it comes to healthcare as part of the Q&A. I just came across this, which succinctly states the financial problem and gives some clues as to places to look for a solution:

“Too Much Medical Care?” by Tara Parker-Pope in the New York Times, July 25, 2012

The numbers are staggering. Health spending in the United States neared $2.6 trillion in 2010 – that’s 10 times the $256 billion spent in 1980. The Institute of Medicine estimates that in 2009, the most recent year for which data are available, the country spent about $210 billion on unnecessary medical services.

Broken down, this means that the United States spends about $8,000 per person annually on health care – that’s about 50 percent more than Norway and Switzerland. In the United States, hospital stays are far more expensive than those in other countries, averaging about $18,000 per discharge, compared with less than $10,000 in Sweden, Australia, New Zealand, France and Germany.


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