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January 26, 2015

With the State of the Union Address past us, I thought I would give my own economic State of the Union assessment, but being a numbers guy, strictly by the numbers. So herewith my top 10 “numbers” to describe the true financial/economic State of the Union:

  1. #1 –OSU Buckeyes are No. 1!—I am NOT a OSU grad (though I have started doing some teaching at the school), but OSU is Columbus’ team so we are justifiably proud.
  2. $18 Trillion (and Counting)–The amount of federal debt as of today. Incredibly, it has DOUBLED since 2007 from $9 Trillion and has grown by a factor of 20 times since 1980. Most projections have it growing significantly in the future reaching $25 trillion or more by 2024.  While many try to minimize the number by expressing it as a % of GDP, the sheer magnitude of this debt burden is mind-boggling by any stretch of the imagination. To put in context, consider if the debt were all in $20 bills and we asked a team of 25 accountants to count it up. Assuming they could count one bill per second and took no breaks for eating or sleeping, it would take them 1142 years to count $18 Trillion.
  3. $483 billion– the size of the 2014 budget deficit. This is in part good news since the deficit is now significantly lower than the $1-1.4 trillion numbers that we suffered thru during the 2008-2012 period. However, it is still higher than ANY budget deficit that we had prior to the 2008 financial crisis and recession. Given that we are getting close to the end of the current economic expansion, we should be running a surplus and paying down our debt (as we did briefly during 1999-2000) NOT incurring deficits.
  4. $3.5 trillion to $5.8 trillion–Increase in total federal spending from 2014 to 2024. According to the “optimistic” projections of the CBO (assumes “sequestration” will be enforced after it expires in 2021 and interest on the debt will ONLY total $0.8 trillion by 2024 ), federal spending will still grow by about 2/3 or $2.3 trillion in just 10 years. 85% of this increase will come from “mandatory” expenditures on social welfare expenditures (e.g. food stamps), Medicare, Obama care, Medicaid, federal disability, social security, VA and other government pensions and interest on debt. Interest payments will go from $271 billion to $566 billion in 2020 and to $799 billion in 2024 or a growth of $0.5 trillion in a decade. However, CBO’s estimates assume only moderate inflation and relatively small increases in interest rates, while higher inflation and much higher interest rates are a much more likely scenario (given our massive fiscal and monetary stimulus of the past 6 years). Thus, I believe interest payments ALONE could total $1 trillion as early as 2020 or more than we will spend on the entire Social Security program in 2015.
  5. $962 billion to $1.9 trillion– Increase in federal medical/health spending from 2014 to 2024 -Health care expenditures will more than double increasing by almost $1 trillion. Medicare will account for the largest part of the growth, growing by $435 billion (from $603 billion to $1.038 trillion) and Medicaid will grow rapidly (by 87%) from $305 billion to $570 billion. Obama care will cost $1.8 trillion over the next decade (growing from $38 to $208 billion by 2020 and to $235 billion by 2024). This reflects the combination of government subsidies for the exchanges and the significant expansion of Medicaid under the law. (So much for “cost-containment” under the “Affordable” Care Act !). The really bad news here is barring a complete scrapping/ major reform of the entire federally funded health care system, it is hard to imagine how we will rein in its costs. Unfortunately, I don’t see there being much chance of this happening in the next few years.
  6. $845 billion to $1.5 Trillion–Increase in Social Security program spending from 2014 to 2024 —Today’s largest single federal program area, Social Security will be growing rapidly as many baby boomers begin to reach retirement age. The good news is that this is one of the areas that actually can be “fixed” (so that spending is more aligned with revenues coming into the social security trust fund). Some combination of increasing the age eligibility for social security to 70 years or so, reducing the income thresholds where benefits are taxable, reducing the annual inflation adjustment for benefits, an increase in the income threshold for paying Social Security taxes, and some means-testing for benefits would do the trick. However, many Democrats and some Republicans have been opposed to ANY cut in benefits given their fear of the AARP lobby. Without some cuts in benefits in the future, the chances of putting Social Security on a reasonably sound financial footing is remote.
  7. $3.02 trillion – 2014 Tax Revenues –The good news is that the economy has started to grow more significantly so there is more tax revenue. The bad news is that the tax revenues are already at record absolute levels (about $0.55 trillion higher than just two years ago) and assuming growth to about $3.3 trillion or 18.5% of GDP as currently estimated by CBO, we will start to come close to all-time highs as a percent of GDP. (aided in large measure by extremely low-interest costs for businesses, peak of stock market prices, highest profit margins ever, plus largest absolute $ tax increases in 2013 in US history). Historically, since 1946, we have only reached 19% of GDP three times ( in 1969, 1981 and 1998-2000) and in each instance, tax revenues began to decline thereafter because we were at the peak of a recovery  AND/OR the tax burden was high enough that it started to impede growth. Of course, this means that broad revenue-neutral, tax reform is sorely needed to make the tax code more efficient and expand the tax base. In other words, we have to stop collecting taxes under the current idiotic tax code and move to something much smarter and vastly simpler.
  8. 5.6% – Unemployment rate – The best news on the economy in the past couple of years had been more significant declines in the unemployment rate. At 5.6% in December 2014 , the unemployment rate is now lower than anytime since 2008 and for the first time has fallen below the average 1948-2014 rate of 5.8%.
  9. 62.7% – Labor force participation rate – While the good news of the past couple of years is the decline in the unemployment rate, the bad news is that the better economic barometer for the health of the labor force – the labor participation rate – is at record lows not seen since the late 1970s. Simply put, many working age people have simply given up looking for a job and left the labor force entirely. This rate does not reflect another problem, that many of the new jobs since the recession have been part-time rather than full-time work.
  10. $0.8 Trillion to $4.1 Trillion- Increase in the US Monetary Base from 2008 to 2015– The US printed about $3.3 Trillion in new money mostly during 2008-09 and 2012-2014 under its 3 QE programs  (Quantitative Easing). This quintupled the US monetary base over the past 6 years. The good news is that the Fed has ended its QE programs at least for the time being. Also, we haven’t felt the large long-run inflationary effects of this unprecedented money printing (YET!). However over the past 6 years, money printing has become the crack cocaine of the world economic system. It is extraordinarily addictive since in the short run it has bolstered the US and other world stock markets and on the surface at least appears to bolster the overall economies thru ultra-low interest rates and expanded borrowing. However, it is important to note that money printing produces no tangible economic value and comes with a long-term cost, much higher inflation (and in extreme cases hyper-inflation) which typically results in economic recessions and/or depressions. We have already set the stage in the US for massive inflation, and a stock market collapse. Right now, all that is keeping this at bay is that the US looks much better relative to Europe, Japan, China and many of the emerging economies (and the dollar is strengthening which lessens inflation) and our banks have yet to loan out their trillions of $ excess cash reserves.

The biggest problem in the US and world economies is that we all desperately want robust economic growth, more jobs and better incomes for our population, and everyone wants a quick fix to get there. At best, money printing and deficit spending are imperfect short-run strategies to help enable the economies to grow. However, the US and now Europe, Japan and China (and even Canada) have moved increasingly to the point of using loose fiscal and monetary policy as the ONLY long-run strategies to grow the economies. Economic growth does not come from fiscal and monetary stimulus in the long run. Instead, the key is improving economic productivity (output per labor and capital inputs) which has generally comes thru key technological breakthroughs and inventions. (e.g. the automobile, harnessing of electricity, computer, jet, satellites to name a few major ones in the 20th century etc. ). While these advancements  aren’t usually anticipated, they don’t occur by accident. Rather, they need a business climate that is conducive to technological breakthroughs. In my opinion, the answer to future long run economic growth is rooted in five principles: simple and efficient taxes, free market competition and market deregulation, much lower government spending , conservative monetary policies, and free trade. It is only in this environment will we see the type of breakthroughs we haven’t even thought of yet  which will lead to future improvements in the standard of living in the US and around the world.

Enough said. But the next time anyone says everything is fine with the US economy and the management of our government, remind them of these 10 numbers that tell a very different story.

 

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