Why $16 Trillion Only Hints at the True U.S. Debt

[flyingpylon]

WSJ article:

Why $16 Trillion Only Hints at the True U.S. Debt

I realize there are a lot of different opinions about this sort of thing.  Any comments?  How does this get resolved... or why is it not an issue?

[moda0306]

The article goes on the "unfunded liability" babble that confuses the issues of SS and Medicare.

The true "funding" of Medicare and SS doesn't come from numbers on a screen or some phantom "trust fund" account.  It comes from society's ability and willingness to produce the goods and services that SS & Medicare demand.  The "assets" that offset these future "liabilities" are all the young able-bodied Americans that are between the ages of 12 and 40, today.  No numbers in an account, even if these were in gold, could make up for a lack of enough productive capacity to produce the goods/services elderly people will consume.  These liabilities are funded... with the work of the productive, younger members of society... just as they always have been.

Building up a SS trust fund is appearing to be one of the most idiotic macroeconomic choices that got bipartisan approval in the last 30 years.  The way you secure the retirement of a demographic bulge is to ensure the ability for their children to build a productive, secure economy.  Putting fiat dollars into a meaningless account, if anything, limited the potential growth of the very middle class they were trying to provide eventual retirement benefits to, thereby, likely, limiting their children's potential as well.  It unnecessarily taxed a generation of middle class Americans, and in no way/shape/form is this "fund" going to help make the worker-bees more productive than they otherwise would have been to provide goods/services to our retirebees. 

The real question, as it has been since 1934, is whether the workers in the economy have the productive ability and will to make what the retirees want, as well as enough for themselves to be happy.  A demographic bulge presents some moderate problems with that model (though I think they're grossly overexaggerated), but nothing that can be fixed by confetti in a trust fund.

[Gosso]

What Moda said.

Further, if the US can maintain a real interest rate of -2% then the purchasing power of the debt will be cut in half in 30 years:

16 Trillion x (1 - 0.02) ^ 30 years = 8.7 Trillion

Slow motion default?? 

[RuralEngineer]

The article goes on the "unfunded liability" babble that confuses the issues of SS and Medicare.

The true "funding" of Medicare and SS doesn't come from numbers on a screen or some phantom "trust fund" account.  It comes from society's ability and willingness to produce the goods and services that SS & Medicare demand.  The "assets" that offset these future "liabilities" are all the young able-bodied Americans that are between the ages of 12 and 40, today.  No numbers in an account, even if these were in gold, could make up for a lack of enough productive capacity to produce the goods/services elderly people will consume.  These liabilities are funded... with the work of the productive, younger members of society... just as they always have been.

It's not enough to simply ensure that the young workers can produce the necessary goods/services for the elderly to consume.  The elderly also have to be able to purchase those goods/services and that requires a wealth transfer from the young to the old.  That's where the "numbers on a screen" come in.  Right now we're seeing a dramatic shift in the ratio of workers to retirees that is eventually going to limit SS ability to provide the elderly with the means to consume the goods/services they require.  Since SS funding is based on a fixed percentage of wages and these wages don't appear to be growing quickly enough to handle the change in demographics, it's predicting bankruptcy in the future.

However, all hope is not lost.  SS is the greatest ponzi scheme ever conceived since it has the added bonus of being able to not only force continued contributions once payments being to exceed income (where a ponzi scheme usually collapses), the government can also increase taxes to fight shortfalls without increasing benefits!  People can KNOW that they'll never even get their capital back, let alone any interest and still have no option but to contribute!  Brilliant!

[moda0306]

RuralEngineer,

You're right that providing benefits to the elderly involves a wealth transfer from the workers to the old... it isn't just about can the young physically do the jobs the old need us to do, but whether they will do those jobs, considering that they'll have to be taxed to prevent inflation when the elderly receive their benefits. 

But once again, whether the young are able AND willing to do the jobs the old demand and pay the taxes necessary to keep inflation tame, will have NOTHING to do with how much is sitting in the trust fund.  Now, yes, according to the rules of Social Security, there is a "fund" behavior to it all, and if the "fund" went dry the SS administration very well might have to cut benefits to equal FICA revenues... but these are constraints that SS has put upon itself, not constraints of the broader economy on the ability and willingness to work hard enough for themselves AND retirees.

We can never escape that constraint with a trust fund, nor does the supposed inadequacy of the trust fund provide any true constraint (except the constraint we and the Administration put on it with rules around "funds").  It all boils down to the productive economy's ability and willingness to support retired people.  This gets more difficult when the percentage of retired people goes up, but looking at a fund, what it's invested in, and when it will "run out" will be pretty fruitless when trying to determine the real economic constraints of our economy.  You can argue moral points all you want, as well.  We could have a very different discussion on that front.  I think this is more about funds and constraints of a social program, not whether it's moral to have the government take from the productive to give to the elderly.

[flyingpylon]

I'll admit that I am not yet able to fully grasp some of the concepts in these replies. They seem so... conceptual. 

I get bogged down in the practical problem of X retirees expecting $Y from Z workers and the whole thing just not adding up.

I understand that "unfunded liabilities" are not the same as contractual debts (i.e. we can decide not to honor them), and also that those liabilities can and most likely will be paid in dollars that are worth "less" than they are today.

Moda, are you saying that the dollar value of these unfunded liabilities is irrelevant because in the end, as a society we will simply either decide not to honor them at some point, or will grow enough to honor them (or increase the money supply enough to honor them)? If so, it seems like that would make retirement planning rather difficult, and generational warfare inevitable given current trends.

[moda0306]

flyingpylon,

I'm basically saying nothing about how we will or will not choose to honor these "liabilities," but that the liabilities, as they always have, are funded by the productive capacity and willingness of the younger people.  Is it more difficult for 70% of the population to support 30% of the population than 90% to support 10%?  Absolutely.  Is there anything "unfunded" about our liability to the elderly?  Well only if we as the productive young can't or won't produce the wealth we all need/want.

[craigr]

Well only if we as the productive young can't or won't produce the wealth we all need/want.

Or if the young vote in politicians who favor their interests vs. those on Social Security and restrict the funding that way.

IMO. A likely situation going forward. And very likely in 30+ years.

[moda0306]

craigr,

I don't know if a demographic bulge of people going into retirement bodes well for young people... maybe there will be a bit of a reactionary event, though...

[brick-house]

Interesting article: 

http://www.theatlantic.com/business/arc ... ng/265599/

The most important economic story of the next generation is health care. You can get a good feel for why costs and employment in the medical industry are rising in graphs (3) and (4), respectively. As the Boomer generation moves right along the X-Axis of Life, national spending on drugs will boom along with demand for personal health aides. As health care adds more people (as other industries, like retail, make do with fewer), costs will rise faster than inflation, putting pressure on the government's ability to pay for our seniors' care from a smaller base of taxpayers.

Young subsidizing the old, Dogs and Cats living together, - mass hysteria.  - Strange days indeed -most peculiar, mamma...

Medicaid is turning into government funded long term care insurance.  The poor and middle class use Medicaid after spending their assets to zero leaving nothing to transfer to the next generations.  The "savvy" rich hire elder care planners/attorneys to gift/trust assets down to zero to transfer to the next generations - then eventually utilize Medicaid as long term care insurance - so it goes... 

http://www.nytimes.com/2012/09/07/healt ... d=all&_r=0

Though former President Bill Clinton overstated in his convention speech on Wednesday how much Medicaid spends on the elderly in nursing homes — they account for well under a third, not nearly two-thirds, of spending — Medicaid spends more than five times as much on each senior in long-term care as it does on each poor child, and even more per person on the disabled in long-term care.

This discussion made me think of Bubba Ho-Tep - ever seen that flick?

http://www.imdb.com/title/tt0281686/

[MachineGhost]

I get bogged down in the practical problem of X retirees expecting $Y from Z workers and the whole thing just not adding up.

What you don't see on the U.S. Debt Clock is the "unfunded revenues" that go along with the "unfunded liabilities".  That just wouldn't do to properly scare people.

All wealth -- which is a claim on future income -- comes from productivity; money is just a social conceptualization of the ability to transfer said wealth to others or to store it for later.  Nothing more, nothing less.

Inflation is a manifestation when the mix of money produced by the economy has become out of line with the mix of money demanded.  Since the free market is quite responsive to demand, it is typically a government boondoggle of some kind supplying too much money vs demand.

[Gosso]

+1 moda.

To expand on Gosso's point, I came across an article the other day about the debt that made alot of sense to me. 

Is the Federal Debt Unsustainable

My own version of the math (it involves differential calculus):

Assume the annual growth rate for annual GDP is g. This means the rate of change for annual GDP is:

d(GDP)/dt = g * GDP

Government debt will decrease as a result of an annual surplus, and increase due to interest on existing debt.  So the rate of change for government debt is:

d(DEBT)/dt = -S + r * DEBT

where S is annual government surplus and r is the annual interest rate.  Applying the chain rule (I'm omitting the algebra), the ratio of debt to GDP is given by:

d(DEBT/GDP)/dt = -(S/GDP) - (g - r) * (DEBT/GDP)

A couple things fall out of this simple expression:

* If g < r then any debt is unsustainable, in that DEBT/GDP will grow without bound.

* If g > r, then the debt-to-GDP ratio will stabilize somewhere, which is by definition "sustainable".

So the key is for interest rates to remain low, and, in particular, below the rate of GDP growth.

Also the debt-to-GDP ratio will stabilize at

(DEBT/GDP) = -(S/GDP)/(g - r)

If we assume a nominal growth rate of 5% and nominal interest rate of 1%, and a government deficit of 5% of GDP, (i.e. S/GDP = -0.05), then DEBT/GDP will stabilize at a value of 1.25 years.

Thanks for the article and the math!  That helped to repair a few loose connections in my brain.

[moda0306]

I get bogged down in the practical problem of X retirees expecting $Y from Z workers and the whole thing just not adding up.

What you don't see on the U.S. Debt Clock is the "unfunded revenues" that go along with the "unfunded liabilities".  That just wouldn't do to properly scare people.

All wealth -- which is a claim on future income -- comes from productivity; money is just a social conceptualization of the ability to transfer said wealth to others or to store it for later.  Nothing more, nothing less.

Inflation is a manifestation when the mix of money produced by the economy has become out of line with the mix of money demanded.  Since the free market is quite responsive to demand, it is typically a government boondoggle of some kind supplying too much money vs demand.

MG,

Very well put.  It all comes down to productivity.  Trust fund rules might prove an actual constraint, but that will be simply because we look at it and scream.  We can argue the morality of theft, which is a different discussion.  Even if the fund were twice as large and made of gold and leather chaps instead of confetti, that's all for naught unless that gold and leather chaps can procure more prunes, Buicks, nurses, drugs, RV's, cruises, etc out of the real economy... and I'll add that I hope I didn't offend anyone with the sarcasm of my "budget list" of the typical retired person.

No link or anything, but I recently heard that even after the trust fund runs out in 2040-something, through FICA we'd still be able to fund 75% of SS benefits.  Now, a 25% cut in SS isn't nothing, but it's not complete destruction of the program... and that's assuming we have to abide by "fund rules," as opposed to simply making a retirement safety-net a priority and ignoring meaningless fund balances, and taxing based on whether we have full employment, not preserving said fund.

[Storm]

I really like this snarky way of explaining MMT:

[Storm]

Another one:

[MediumTex]

I really like this snarky way of explaining MMT:

It is part of a very elaborate scheme orchestrated by Ernst Stavro Blofeld, and all of the money is actually owed to him.

[Gosso]

Looks like Krugman agrees with the article that TennPaGa linked to earlier in this thread, How Big Is the Budget Hole?:

Meanwhile, zero is not the crucial number for the deficit; a much better criterion is the budget balance that would, on a sustained basis, stabilize debt as a percentage of GDP. Now, debt is currently slightly over 70 percent of GDP; with 2 percent growth and 2 percent inflation, that means that a deficit of almost 3 percent of GDP, say $450 billion, is consistent with a stable debt ratio.

Put these things together, and the real hole in the budget is a lot smaller than a trillion dollars — in fact, there may not be a hole at all.

Now, this doesn’t mean all is well. For one thing, if and when the economy recovers we really should be trying to reduce the debt ratio, not just keep it stable. Also, an aging population and rising health care costs mean that under current policy we will have a substantial structural deficit a decade from now, even if we don’t have one currently. So I don’t want to suggest that there is no deficit issue. But it’s nothing like the ONE TRILLION DOLLARS that you keep hearing.