Did Someone Say My Name?

February 13, 2008 at 10:55 pm 11 comments

Back by popular demand, thanks TRussell, I thought I could pop in and write a word or two on entitlements and the trade deficit. Exciting? YES!

On the topic of the federal budget, entitlements are problem numero uno. If you hear anything from candidates, or talking heads, it’s the headline grabbing “earmark.” So, first let me dispel the myth. Earmarks have nothing to do with the budget problem we are facing. Earmark battles are really about WHO spends the money, not whether it is spent. Specifically, if the budget is $3 trillion, which is the president’s FY 09 request, that is the overall spending level that is set. The process starts with the president’s request, which is submitted to Congress. The request has little meaning. The House and Senate set spending priorities through the appropriations process. (First, they are supposed to pass a budget resolution, but since resolutions don’t have the force of law this part can be, and is often, skipped.) Appropriators then write the spending bills that will run the federal government. Up to 13 bills covering different agencies. The sum total of the bills is the federal budget, which may be at, above, or below the president’s initial request. Inside each bill are hundreds of specified projects, earmarks, which direct spending. Members of Congress like to specify projects, especially when they are from a state with a small population that is unlikely to get much “love” from the executive branch. Where the Congress does not name projects, projects will be selected by bureaucratic agencies. Either way, the overall budget number is not changed, it’s just who makes the call: the Member of Congress, or the individual at the agency. So, back to entitlements.

Entitlements constitute a portion of the federal budget known as “mandatory spending.” Meaning, the funding is set by law and formula. The largest of these are Social Security, Medicare, and Medicaid. They constitute, with other mandatory spending, over 53% of the federal budget. National defense is not mandatory spending, it is discretionary. Earmarks fall in the discretionary pile. So, why do entitlements matter? The growth rate of entitlements is what is significant. Some 30 years ago the entitlement programs amounted to about 25% of mandatory spending. Aging baby boomers add to entitlement spending, as they increase the demands on Social Security and Medicare, and possibly Medicaid. Also, as they retire they stop paying into Social Security. If the programs continue to grow unchecked, more and more discretionary spending, including defense, will be bumped out (or the budget will get huge).

A side note: when talking about all these numbers it is important to do it as a percentage of GDP. The debt, deficit, revenues, outlays, all should be discussed in terms of a percentage of GDP. Big numbers are thrown at you to confuse you, don’t let them. In normal person terms, if you have a bigger income you can afford a bigger mortgage.

Social Security is the smallest problem, and probably the easiest to fix. One solution is to index benefits to inflation, rather than wage growth. That way real benefits stay constant, rather than growing with successive retirees. Another possibility is to raise the cap on Social Security taxes. One hope that was had in bringing the issue of Social Security to the fore 3 years ago was that Congress would gain experience to tackle Medicare and Medicaid. The problems with Medicare and Medicaid are much more complex. First, because they deal with the rising costs of health care. Since the federal government isn’t in control of health care, at least not yet, it can’t do much to force prices down. Also, most payments are based on formulas that don’t adjust quickly and can create incentives to over prescribe certain procedures, just because they create a high return for doctors. Since this post isn’t about solutions, and I don’t have them all, you should check out CBO for some good estimates on what different approaches would cost and save. It’s actually a good way to see how campaign rhetoric stacks up.

On the issue of our current account deficit, I wouldn’t worry. Seriously. First, as the dollar weakens American exports become cheap to other countries, driving them up. At the same time, imports become more costly, driving them down. So, a weak dollar shrinks the gap. Is that good or bad? I was actually at a hearing on sovereign wealth funds today, which is a central part of the concern about China, or other countries, buying all our debt. As long as other countries consider it a good investment to invest in America, the question should be, “why don’t other American companies think the same?” Many businesses have significant cash on hand, so do private equity firms. To some extent, rational effective market participants might prefer foreign investment. Sovereign investors rarely have the “takeover and turnaround” mindset of a Bain Capital, or the like. Also, on the topic of trade deficit, you should play around on the FRED, which is operated by the St. Louis Federal Reserve. I get paid to, but I would anyway. You can graph back about 70 years of the trade deficit, and see that it fluctuates quite a bit. As Bernanke has put it, the current account deficit has as much to do with a global savings glut as it does our lack of savings.

Whew. Thanks gang. I just kind of spat that out, so if there are problems or questions let me know. But you should be able to kick some water cooler behind now, and tell people why Lou Dobbs is a fear mongering dirt bag.



Entry filed under: Commentary, Current Events, Politics. Tags: , , , , , .

Enough Check it!

11 Comments Add your own

  • 1. TRussell  |  February 14, 2008 at 2:11 am

    Sounds like you have minimal worries. It seems your perspective is that of a domestic, budget guy. Is that fair? Not that I am some global financier, but I can’t believe that China holding our debt, OPEC talking of accepting payment in Euros, the trend of sovereign central banks to diversify out of the dollar, the savings glut, the housing failures and subsequent lowering of interest rates which will drive money out of the U.S., tremendous inflationary pressures caused by lowering the interest rate and commodity prices and crappy ethanol policy, that we are just going to overcome this? That the dollar will not crash? Especially if our debt is downgraded?

    I can see that a weak dollar is a good thing for exports, but we have had a weak dollar for some time with no reversal in the current accounts. Now it seems the weak dollar is on the verge of limping. How do we overcome it?

    That is really the question. How does this unwind in a way that doesn’t take us by way of a recession or depression?

  • 2. Sportsattitude  |  February 14, 2008 at 6:26 am

    Mike & TRussell make eloquent points about stuff I try to get my arms around but since I’m a bit out of my element with their knowledge…I’ll come at this from another level…Americans are having to redefine and reposition themselves in the work force as their jobs disappear and/or move elsewhere. They almost always start out at a lower income. Prices continue to rise. Health care, if they can get it from their new employer, is more on them to pay than ever before. Those employment figures capture those actively getting unemployment compensation. Once that runs out, you’re off the books with the media and considered…nothing. I think that’s what a lot of folks forget when talking about jobs…the one’s being created are at Applebee’s and Chili’s…and those who can’t find work after six months go into a reporting black hole. The economic turmoil is a ground war as much as anything. Who would want to invest in what is going on in the trenches?

  • 3. Lowdogg  |  February 14, 2008 at 10:29 am

    Our current statistical measures do not adequately capture less conventional forms of employment, so not everyone that is employed is counted accurately.

    Likewise, the GDP doesn’t take into account intellectual capital moving in or out of a country. It doesn’t adequately measure everything we are doing.

    I am no currency expert, but the diversification out of the dollar seems like a natural progression for banks that have to take into account the growth of other economies. If China or India grows relative to the US economy, central bankers may opt to buy more yuan or rupees. I don’t worry about China in the long run. They have such tremendous demographic problems looming based on their population controls. To some smaller extent Europe will experience this as well. This is not a positive long-term trend for those economies, and I would imagine for their currencies as well.

    I’m an optimist, but I appreciate Tim’s concerns as well. I wish I could just opt-out of Social security all together. I want to fend for myself.

  • 4. Mikel  |  February 14, 2008 at 5:29 pm

    Some of the concerns about foreign countries diversifying their investments is overhyped. If anything, that diversification is good for them long term, but not necessarily short term. Some make it sound like China could decide tomorrow to dump all its dollars. That is all but impossible, since dumping dollars has an impact on remaining dollars they still hold. Each successive dollar they sell would be worth less as they add to the supply of dollars. It’s like if you tell somebody you’re selling all your furniture, which you value at $5,000, because you are moving. People who know you are moving, will bid down your furniture. Also, Fed policy can absorb most rises in the supply of dollars by selling bonds and targeting a higher interest rate.

    Also, interest rate problems are more global. Europe in particular is struggling with the same financial problems that we are. It is a lot to lay at the feet of the former Fed Chairman.

  • 5. Joey  |  February 15, 2008 at 4:59 pm

    Mikel and LD, you might as well know I am president of both your fan clubs. Very pleased with the blog entry and the comments. We’ll have to check with Massimo, but when the Revolution comes, I’m pretty sure he’ll let you help me with the 5-year plan.

  • 6. lemare  |  February 15, 2008 at 5:53 pm

    Fear-mongering dirt bag is an excellent term. Who else fits the bill? Should we compose a list?

    Daniel Henninger at WSJ points out that Obama’s message (if you filter out all the fluff) is actually quite grim: http://online.wsj.com/article/wonder_land.html

    I’m not going to call him a dirt bag yet, though.

    I can’t wait for Massimo’s revolution. Can I deisgn the uniforms with Joey’s wife?

  • 7. Sportsattitude  |  February 16, 2008 at 6:48 am

    LeMare – did not see or hear of the WSJ article – thanks for noting it. I do think the current outlook for this country and the world is grim. I don’t think that means I’m not optimistic, just realistic. You can see and express an ongoing situation as being negative but still be positive about its future. Lou Dobbs…I don’t see him as being positive about anything so “FMDB” looks to be an accurate term.

    If somehow Billary pulls this out, would you please design something for her to wear?

  • 8. Lowdogg  |  February 16, 2008 at 8:30 am

    It’s only realistic if that is what is going to happen, and your belief as to whether that will happen is what makes you optimistic or pessimistic.

  • 9. Marcus  |  February 19, 2008 at 2:53 pm

    Sorry to go off topic here, but since I am not allowed to post at this blog (hint, hint) and am relegated to the comment section as my only forum, I guess this is as good a place as any to call attention to the latest in a string of disturbingly Heinz-Kerry-esque lunacies from your soon-to-be First Lady. At least McCain’s Botox-Silicone-Billionaire-Junkie-DreamBarbie-From-Mattel had the sense to counter this one. http://youdecide08.foxnews.com/2008/02/19/michelle-obama-takes-heat-for-saying-shes-proud-of-my-country-for-the-first-time/

  • 10. lemare  |  February 19, 2008 at 6:06 pm

    Marcus, I thought about posting this here. UNBELIEVABLE!!! Really, she wasn’t proud when we banned together in love and support after 9/11? She isn’t proud when she sees young men voluntarily leaving their families to fight for their country and our safety? she isn’t proud when there is bipartisan disapproval of Britney Spears?

  • 11. lowdogg  |  February 19, 2008 at 6:25 pm

    Marcus, submit thy post for the blog!

    I have to admit that I think Cindy McCain is kind of hot. In a scary way.


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