Congressional Budget Office Director Keith Hall, who has been on the job since February 27, 2015, testified about the state of the U.S. national debt on July 9, 2015. CNSNews’ Terence Jeffrey reports on Hall’s testimony before the U.S. Senate’s Homeland Security and Governmental Affairs Committee, in which he described how the CBO projects the portion of the nation’s total public debt outstanding that is held by the public will grow:
In 2015, the CBO estimates that the U.S. government debt will be 74 percent of GDP. That is higher than the 69-percent-of-GDP debt the U.S. government had in 1943—the second year after Pearl Harbor.
By 2039, CBO projects, the debt will increase to 101 percent of GDP and by 2040 to 103 percent GDP.
At that point, Hall told the Senate Homeland Security and Governmental Affairs Committee, the “debt would still be on an upward path relative to the size of the economy.”
Three researchers at the New York branch of the Federal Reserve, David O. Lucca, Taylor Nadauld and Karen Shen, have just published the results of their study into whether federal government-backed or -issued student loans and other forms of government assistance are contributing to the rise in college tuition. Here’s their key finding, as described in the abstract of their report:
We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent.
What that means is that for every $3 increase in government-subsidized student loans, U.S. colleges and universities are able to increase their tuitions by $2. That kind of dynamic and greed on the part of university administrators goes a very long way toward explaining why the cost of a college education has skyrocketed in recent decades.
Meanwhile, they also found that when the government provides financial assistance for students by directly giving them money through Pell Grants, for example, every dollar increase in that kind of aid would appear to prompt U.S. higher-education institutions to increase their tuition by 55 cents.
Of the two forms of government education assistance, the authors suggest that grants, on net, are more beneficial for students because they cause tuition to rise by a lower amount and because they never have to be paid back. But the same is not true for government-subsidized student loans:
From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit its recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.
In other words, because this form of government subsidy contributes to larger increases in college tuition bills, government-subsidized student loans actually reduce the rate of return that borrowing students earn on their investment in their higher education to near-zero levels. Yes, subsidy-inflated tuition bills inflate the size of student-loan payments that much.
And that’s not even considering the fact that the U.S. government borrows money to issue money-losing subsidized student loans. That borrowing means that many of the same students, who aren’t even benefiting economically from going to college, will have to pay higher taxes to compensate for the cost of running up the national debt, because they borrowed from Uncle Sam to go to college.
There’s a saying that applies here: “If you thought you were poor during college, just wait until you have to pay your student loans back.” It’s a bigger bill than just the sum of all the student loan payments!
Today, the Independent Institute is launching a fun, five-part, satirical, YouTube web series called Love Gov!
Here’s more information on what the series is about:
“Love Gov is a way to help anyone, especially Millennials, understand the federal government’s ever-expanding reach into personal lives,” says David J. Theroux, Founder and President of Independent Institute. “It’s a lighthearted approach to reach audiences on a personal level, and inspire them to learn more and take action.”
The series, which will premiere on YouTube and is being produced by Independent in association with Emergent Order, depicts the federal government as an overbearing boyfriend—Scott “Gov” Govinsky—who foists his “good intentions” on a hapless, idealistic college student, Alexis.
Each of the Love Gov series’ five episodes follows Alexis’s relationship with “Gov” as his intrusions and interventions wreak (hilarious) havoc on her life, professionally, financially, and socially. “Gov” inadvertently creates excessive student loan debt, expensive housing, underemployment, inadequate and expensive healthcare, and commits personal privacy violations. Alexis’s loyal friend Libby tries to help her see “Gov” for what he really is—a menace. But will Alexis come to her senses in time? Tune in to find out!
Be sure to check out the MyGovCost app – we can calculate your personal cost of government right at your fingertips, just like Libby!
This year, to mark the Fourth of July holiday, we’re featuring a chart showing the growth of the U.S. federal government’s spending, tax collections and the national debt from 1940 through 2014, using patriotic colors:
Probably the most amazing thing this chart reveals is how much faster the nation’s total public debt outstanding grows than its deficits (the amount of government spending not covered by tax collections) do.
[This chart was inspired by one featured by Ricochet’s John Gabriel in Athens on the Potomac.]
As Loretta Kalb of the Sacramento Bee reports, Deborah Bettencourt, superintendent of the Folsom Cordova Unified School District, will receive a pay increase of $24,269 as of July 2. The increase of 7.5 percent boosts the superintendent’s pay from $221,500 to $245,769. Bettencourt’s salary is far beyond that of California’s governor ($173,000), the attorney general ($151,000), and the state treasurer, ($139,000).
Board president Teresa Stanley told Kalb, “I think Debbie has done an amazing job,” but the increase was not tied to any measurable increase in student achievement. Bettencourt does not teach and, strictly speaking, is not an educator. She was hired in 1997 as the district’s chief business officer and became superintendent in 2010. As it happens, her raise was not isolated.
On July 1, a $20,000 raise kicks in for Steven Martinez, superintendent of the troubled Twin Rivers Unified School District in the Sacramento area. The 8.3 percent hike boosts Martinez’s pay to $260,000, also far beyond the salaries of the governor, attorney general and treasurer. As the Sacramento Bee noted, the new deal also “raises his district-funded payment into a retirement account from $7,500 to $15,000 annually, with gradual increases up to $21,000 in 2017-18.” And Martinez will be exempt from a new regulation that forbids “car allowances and other perks to count toward pensions if they are rolled into a salary.” Martinez’s sweetheart deal converts a $10,000 car allowance into pay. Board member Linda Fowler said “offering him an increase is really a strong investment in stability and progress,” but cited no progress in students’ academic achievement on his watch.
According to the California State University system, as of fall 2014, a full 43 percent of regularly admitted freshmen needed remedial education. That represents an obvious failure in the K-12 system, yet the money keeps coming, trickling down through layers of bureaucratic sediment. This should not come as a surprise. The state recently renamed part of the education code for John Mockler, a lobbyist and bureaucrat who got rich working both sides of the table.
Government monopoly education works well for bureaucrats but it’s a bust for parents, students and taxpayers. They need full choice in education, as a matter of basic civil rights.
Back in December 2013, we featured a chart that showed how much debt per resident that Puerto Rico had accumulated. It also showed that Puerto Rico was second only to Detroit, Michigan, which had back then recently declared bankruptcy. Here is what we said at the time:
Considering Puerto Rico’s situation, in the absence of a much larger federal government bailout that doesn’t appear likely at present, the territorial government could soon be forced to default on its public debt, since filing for bankruptcy is not an option available to it.
Puerto Rico is well down the debt death spiral path, as it has significantly hiked tax rates in attempting to increase its revenue to service its debt payments, which have negatively impacted the territory’s economy. The economic situation of the territory is such that more Puerto Ricans now live elsewhere in the United States than are currently living in Puerto Rico, as its residents have increasingly fled the deteriorating economic conditions within the territory.
One year and eight months later, the time has almost fully run out for Puerto Rico to pull out of its debt death spiral. Bloomberg reports:
Prices on Puerto Rico’s newest general obligations sank to record lows after Governor Alejandro Garcia Padilla said investors should be prepared to sacrifice if they want the cash-strapped island’s economy to grow....
The governor is talking about restructuring general obligations, a change from his earlier stance to protect Puerto Rico’s direct debt, said Gary Pollack, who manages $6 billion of munis as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. In May, the governor said in his annual speech to the legislature that defaulting on the commonwealth’s bonds would be a mistake. He called it “folly” at the time....
With two days left in Puerto Rico’s fiscal year, the commonwealth is struggling to pass a budget that would allow it to make payments on a $72 billion debt load. Investors should work with the commonwealth to reduce its obligations, Garcia Padilla told the Times.
“The debt is not payable,” the governor said. “There is no other option.”
And speaking of Detroit’s bankruptcy, according to Reuters, a familiar face with experience in dealing with government bankruptcies has reemerged.
Puerto Rico is “insolvent” and will soon run out of cash, according to a newly appointed adviser to the commonwealth who was the judge who oversaw the historic bankruptcy of Detroit.
The U.S. territory’s future hinges on gaining eligibility for debt restructuring under the U.S. bankruptcy code, a process it does not currently have access to, said Steven Rhodes, who retired as a U.S. Bankruptcy Court judge earlier this year and has been retained by Puerto Rico to help solve its problems. He stressed that bankruptcy would not be a “bailout”.
Puerto Rico “urgently needs our help,” Rhodes said on Monday at a meeting where a dire fiscal report on the island by former economists of the International Monetary Fund was presented to the government. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he said.
So what has Puerto Rico, under the leadership of Governor Alejandro Garcia Padilla, been doing about its fiscal problems during the past 14 months?
If you guessed “borrowing to sustain levels of spending it cannot afford while also hiking taxes to levels that cannot sustain economic growth,” you’re right, as confirmed by the Washington Post‘s reporting:
For now, the debt problems have done damage mainly in Puerto Rico, where it substantially raised loan costs for a government that has come to rely heavily on borrowing to fund its daily operations.
“You cannot pay daily expenses with your credit card, and that’s what Puerto Rico has been doing for years,” said Deepak Lamba-Nieves, research director of the Center for a New Economy, a San Juan think tank. “We borrowed just to keep the lights on.”...
Since taking office, he has tried to do both. Under pressure from the Wall Street rating agencies, his administration has enacted reforms far more dramatic than those made by cash-strapped states on the mainland.
He enacted $1.3 billion in taxes including increased corporate taxes, a broadened sales tax and a new gross receipts levy. The percentage increase in taxes is far larger than what the federal government has ever imposed, according to Richard Larkin, senior vice president of H.J. Sims, an investment firm.
“To say that Puerto Rico’s tax increase for 2014 was monumental is an understatement,” Larkin wrote.
At $72 billion, the U.S. commonwealth’s debt-to-GDP ratio is 70%—just slightly less than the publicly held portion of the U.S. national debt-to-GDP ratio of 74%. And that doesn’t include some $37 billion worth of guaranteed pension benefits that it owes to Puerto Rico’s government employees, liabilities which would boost its total debt load up to 106% of the island territory’s GDP, which compares to the U.S. total public-debt-outstanding-to-GDP ratio of 103%.
With those debt-to-income ratios, if Puerto Rico could declare bankruptcy, it would tomorrow. Its debt clock has run out of time.
Summer travelers know that the Transportation Security Administrative troops, drill sergeants decked out in Jiffy Lube blue shirts, do a bang-up job of making air travel more miserable than it should be. As they take off their shoes and belts, travelers may also know that the TSA is a miserable failure at its appointed task. In recent tests at dozens of airports, a Department of Homeland Security team was able get weapons, mock bombs, and other items past TSA security. The failure rate was a full 95 percent, almost total, in other words. As the Los Angeles Times observed, DHS secretary Jeh Johnson, compounded the problem with a “dismissive response,” claiming that the numbers were “out of context,” and he refused to release the full report because the information was “classified.” That term generally means “embarrassing to the government.” And as the Times editorial noted, TSA lapses are nothing new.
Since 2004, DHS conducted eight covert tests on airport screening operations and all turned up “a number of security failures that persist.” Further, in recent months, “hundreds of TSA employee security badges have gone missing at airports in Atlanta and San Diego. No one knows what has happened to them.” Several years ago, a TSA man, formerly in the military, told David Horsey of the Los Angeles Times, “This is all a joke. I can think of a hundred ways to sneak a weapon through all of this.” Turns out he was right, but the failure rate of 95 percent prompted the government to fire nobody.
Jeh Johnson remained in place and simply transferred TSA boss Melvin Carraway to the DHS Office of State and Local Law Enforcement. TSA bureaucrat Mark Hatfield took over temporarily while President Obama nominated Coast Guard Vice Admiral Pete Neffenger to head the agency. Based on the record, the seafaring man will fare no better, but the TSA illustrates important dynamics.
With the federal government, failure is common and accountability has an existential problem. However redundant, wasteful or abusive, the policy remains: No Bureaucracy Left Behind. That’s why travelers remain unsafe, as the nation sinks deeper into fathomless debt.
What are the consequences of a large and growing national debt?
Believe it or not, the Congressional Budget Office directly addressed that question in its 2015 Long-Term Budget Outlook:
How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government’s willingness or ability to meet its debt obligations, requiring it to pay much higher interest costs in order to continue borrowing money. Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country. Unfortunately, there is no way to predict confidently whether or when such a fiscal crisis might occur in the United States. In particular, as the debt-to-GDP ratio rises, there is no identifiable point indicating that a crisis is likely or imminent. But all else being equal, the larger a government’s debt, the greater the risk of a fiscal crisis.
Even before a crisis occurred, the high and rising debt that CBO projects in the extended baseline would have macroeconomic effects with significant negative consequences for both the economy and the federal budget:
- The large amount of federal borrowing would draw money away from private investment in productive capital over the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital, and therefore lower output and income, than would otherwise have been the case, all else being equal. (Despite those reductions, output and income per person, adjusted for inflation, would be higher in the future than they are now, thanks to the continued growth of productivity.)
- Federal spending on interest payments would rise, thus requiring the government to raise taxes, reduce spending for benefits and services, or both to achieve any targets that it might choose for budget deficits and debt.
- The large amount of debt would restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.
We are actually watching these dynamics play out in Greece right now, where its creditors are demanding it reduce government spending and impose even higher tax hikes—the same formula that plunged the nation into depression as a condition of its first two bailouts. According to TradingEconomics, its debt through the end of 2014 is equal to over 177% of its GDP.
Under the CBO’s alternative fiscal scenario for 2015, in which they also assume that the U.S. economy will not experience any recessions in the future, the federal publicly-held debt-to-GDP ratio will reach Greece’s current level by 2043. Of course, that will be about 5 years after the nation’s total public debt outstanding will hit that level, so the CBO’s projections in this case are quite optimistic.
Evan Schulman, the president and founder of Tykhe LLC, who received a patent in 2006 for his concept of sales participation certificates—a way for businesses and other entities to raise capital to fund their operations—offers an intriguing proposal:
The problem with the federal debt is not only its size but when it needs to be refinanced. A shade less than 70% of the $16 trillion of outstanding federal debt matures in 5 years or less. A 2% rise in rates would, very quickly, almost double Treasury’s interest costs.
Why doesn’t Treasury extend the maturity of this debt to protect us? Interest rates on longer term debt are greater than on short term debt. Every 1% increase in rates today will cost the taxpayer $10 billion annually per $1 trillion; Treasury officials are playing the current low short term rates for every penny. So far they have been correct.
However, let’s ask: “Couldn’t financial engineers design a better instrument than debt?” Debt saddles the issuer with fixed costs, offering no relief if the future does not live up to expectations; and debt exposes the investor to the ravages of unanticipated inflation.
Let Treasury offer a more equity-like instrument, one that paid the investor a constant percent of nominal Gross Domestic Product (“GDP”), and nothing more, for, say, 30 years. Then the investor would have protection from inflation, Treasury would get some relief when the economy was in recession and, since it self-liquidates, there would be no need to refinance the issue; hence we would no longer burden our progeny with our profligate ways.
It’s an intriguing proposal because the U.S. government’s revenues, from which equity payments would be made, have represented a relatively stable percentage of the nation’s GDP for decades—about 17.5% of GDP with a standard deviation of 1.2% of GDP. So long as the equity payments are a fraction of that percentage, it would be a sustainable replacement for debt.
But there is a downside to equity financing a national government this way. Investopedia explains using the example of a business that has used equity financing:
The downside is large. In order to gain the funding, you will have to give the investor a percentage of your company. You will have to share your profits and consult with your new partners any time you make decisions affecting the company. The only way to remove investors is to buy them out, but that will likely be more expensive than the money they originally gave you.
On the plus side, it would make for an interesting episode of Shark Tank if the U.S. President and Treasury Secretary showed up together looking to make a deal.
As we noted, Big Government has been colonizing economic activity through schemes such as the Agricultural Marketing Agreement Act of 1937. This New Deal act, based on the notion that central planning works, set up cooperative boards and conscripted growers into reserve set-asides. This meant that Fresno raisin growers Marvin and Laura Horne, like many other farmers, would have to fork over 30 percent of their crop and get little in return.
The Hornes considered this an act of theft and proceeded to grow, package, and sell raisins on their own, apart from government planners. Their reward was a fine of $695,000. They appealed, and the case reached the U.S. Supreme Court. As Michael Doyle of McClatchy News observes, the decision is now in: “The court said Monday the program that compels some raisins to be held back in a reserve is subject to the just compensation commands of the Fifth Amendment.”
Chief Justice John Roberts ruled that “Raisins are private property, the fruit of the growers’ labor, not public things subject to the absolute control of the state,” adding “Any physical taking of them for public use must be accompanied by just compensation.” The Chief Justice further ruled that the Fifth Amendment “protects ‘private property’ without any distinction between different types.” The decision was 5-4 with only Sonia Sotomayor, who bills herself as a “wise Latina,” objecting to the whole thing.
U.S. Department of Agriculture bosses declined to speak with reporters, but as the case played out, their lawyers made the government position clear. If growers didn’t like the federal program, they were free to plant other crops. Roberts called that “pretty audacious,” and Justice Elena Kagan slammed the whole raisin program as “ridiculous.”
As The Economist observed, “If the court halts the raisin ransacking, it could affect other coercive farm programs, too.” And so it should. Nearly 80 years after passage of the Agricultural Marketing Agreement Act of 1937, it is time to stop government colonization of the market.