A Renaissance View of Deleveraging

7/31/2019 A Renaissance View of Deleveraging

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A Renaissance v iew of De leverag ing

Traditional analysis of debt and deleveraging (the process where households, corporations and

governments are forced to reduce their overall debt) is often biased and incomplete. Opinions of how to

best manage government debt generally fall on clear lines of politics and economic self-interest; usually

with one side saying the government should spend less and another group arguing the government

should tax more. Indeed, as a libertarian it would be easy for me to argue for less government spending

and more austerity. This paper will explore how politicians face a no-win situation when trying to solve

public debt through a traditional partisan lens. We will show that a multi-faceted approach to debt

reduction combined with selective tax increases and a blitzkrieg approach to spurring growth will be the

only option. This paper is not intended to be a prescription for all of our fiscal issues but rather to spur

discussion with some out of the box ideas and challenge the traditional partisan lenses in an effort to

solve this issue.

The Basics

In federal debt discussions it is important to understand two key terms. First, there is National Debt alsoknown as public debt. This is all U.S. domestic debt owed in the form of US Treasuries, currently about

$15.5 trillion. National Debt is important to track because it represents the total amount we owe as well as

the amount we must pay annually to service the debt.

The other key debt term is budget deficit. The budget deficit is the amount the US overspends on an

annualized basis and thereby increases the National Debt. The drivers of the budget are pretty straight

forward. You have money received in the form of taxes, and you have money going out in the form ofspending and debt payments.

Analyzing government debt is similar to analyzing that of a household or corporation. One must consider


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From 1970 to 2012 the public debt went from 20% of GDP to 85%. Generally 100% is considered to be

unsustainable. Many people will point out that at the end of World War II the public debt was roughly

110% of GDP and the government was able to reduce this level to 20% over the subsequent 30 years.The United States was in a situation where the government was able to lower the debt to GDP ratio

through a combination of increased taxes, higher inflation, virtually zero entitlement obligations to fund

and amazing GDP growth, all without having to make too many unpopular policy decisions.

In the last four years deleveraging has added pressure to dealing with the National Debt. Roughly 50% of

the National Debt has been incurred since the economic collapse of 2008 (for comparison this works out

to an increase of $400 per month per person in the National Debt i.e. $400 in month one, $800 in monthtwo $1,200 in month three etc.). It is expected that the National Debt will increase as a way to try to offset

household balance sheet deleveraging, but rarely are debts of this magnitude accepted during times of

peace. Such increases have led to political tension that is further increased by the fact that global

sovereign debt appears to be reaching a breaking point whereby many governments cannot service their

National Debt. In turn this leads to questions as to our governments ability to service its debts.

Table S-5 below is page 210 of the presidents 2012 budget. The budget is broken down into three main

components. Total government outlays, total receipts and the remaining deficit or surplus. Given that the

budget office is forecasting budget deficits for the next decade, we will focus our discussion on outlays

and receipts and thus, how the deficits are being created. Outlays are broken into four subcategories:

1. Security, which includes the military, the FBI, the border patrol, homeland security.

2. Non-security, all other administrative functions of the government.

3. Net interest, which is the payment on treasury debt.

4. Mandatory programs, which includes entitlement spending. A quick look at 2012 will highlight how

difficult of a situation the government faces


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of course you can get these changes through congress. Any spending cuts will be hotly debated and the

most needed cuts to entitlement programs will prove politically unsavory. Moreover, the magnitude of

cuts needed would most likely put the economy into a deep recession or depression and may even spark

riots. In order to successfully navigate out of debt and deleveraging politicians should consider a differentapproach.

Looking Forward

"People are habitually guided by the rear-view mirror and, for the most part, by the vistas

immediately behind them." -Warren Buffett in Fortune, December 2001

Politicians are afraid to make the necessary decisions to ensure the long-term economic wellbeing of our

country because of the political fallout that may occur; it is wishful thinking to believe that we will magically

grow out of our debt like we have been able to in our not so distant past. They are akin to CEOs of
http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/


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be one that minimized annual taxation and maximized the taxation on wealth amassed during ones life.

Allowing business owners and entrepreneurs to utilize their assets during their careers would be a pro-

growth measure. Similarly, taxing large fortunes that now go completely untaxed and are often donated ina way that helps foreign countries would be a pro-growth initiative for the United States. Such a tax policy

when coupled with a consumption tax would spur investment and savings and would have the added

benefit that the government would be an equity partner in the growth and ingenuity of its citizens versus

its current roll where it is viewed by many as one of the biggest road blocks in business.

Policy makers should also take steps to reduce regulation and red tape; regulation not only slows

business it adds to the fixed costs in starting and maintaining a business. Reducing barriers in businessshould be the goal. Tax incentives in the form of payroll reductions should be given to businesses that

are seen as high growth such as information technology, nanotechnology, clean fuel, bio technology, etc.

It is possible that innovation is highly mis-valued by politicians. As recently as 1995-2000 technology

turned deficits into surpluses. Technology may also offer economic growth and qualitative changes that

are yet to be fathomed. It is highly possible that even though we live in the age of technology

advancement has not been at the pace it could be. The legendary technology investor Peter Thiels

Founders Fund (early investor in Facebook) has a tagline of We wanted flying cars, instead we got 140characters. This tagline is designed to show the complete disconnect of what people once believed

could be the trajectory of technological advancement and what actually became reality (140 characters

describing the character limits in twitter). Perhaps we dont have too much debt but rather not

enough technological advancement. It often seems that politicians work ferociously to maintain the

status quo. Instead policies should be made to stir up the status quo; indeed disruptive technologies

need policies that promote disruption.

In the process of reducing government road blocks to business, policy makers would reduce the size of

government and reduce the budget deficit. While this will be a good start, further cuts are critical. The

Military, administrative departments, and entitlement benefits all need to be scrutinized. Deep cuts are

T bl S 5 P d B d t b C t


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Table S5. Proposed Budget by Category(In billions ofdollars)

Totals

Outlays:

Appropriated (discretionary) programs:1

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20132017

20132022

Security ....................................................... 838 868 851 768 749 757 771 786 803 820 837 856 3,897 8,001

Nonsecurity ................................................. 462 450 410 393 385 386 390 397 405 415 420 430 1,964 4,032

Subtotal, appropriated programs ......... 1,300 1,319 1,261 1,160 1,135 1,143 1,162 1,183 1,208 1,236 1,258 1,287 5,861 12,033

Mandatory programs:

Social Security ............................................ 725 773 820 867 918 970 1,026 1,085 1,149 1,216 1,287 1,361 4,601 10,699

Medicare ..................................................... 480 478 523 551 569 619 633 654 716 767 822 908 2,895 6,762

Medicaid ...................................................... 275 255 283 338 370 399 423 450 479 510 542 578 1,813 4,372

Troubled Asset Relief Program (TARP) 2 ... 38 35 12 8 5 2 1 * * * ......... ......... 29 30

Other mandatory programs ....................... 631 711 654 644 665 705 712 716 750 775 821 826 3,381 7,269

Subtotal, mandatory programs ............ 2,073 2,252 2,293 2,409 2,527 2,695 2,796 2,905 3,094 3,269 3,472 3,673 12,719 29,131

Net interest ....................................................... 230 225 248 309 390 483 565 631 692 748 798 850 1,996 5,715

Adjustments for disaster costs 3 .......................... * * 2 5 7 8 9 9 10 10 10 10 31 80

Total outlays ............................................... 3,603 3,796 3,803 3,883 4,060 4,329 4,532 4,728 5,004 5,262 5,537 5,820 20,607 46,959

Receipts:

Individual income taxes .................................... 1,091 1,165 1,359 1,476 1,617 1,763 1,912 2,052 2,184 2,319 2,459 2,605 8,128 19,747

Corporation income taxes ................................. 181 237 348 430 445 455 473 480 485 494 507 520 2,151 4,637

Social insurance and retirement receipts:Social Security payroll taxes .................... 566 572 677 742 781 833 881 936 987 1,034 1,093 1,150 3,915 9,113

Medicare payroll taxes .............................. 188 203 214 226 240 257 273 290 306 321 339 357 1,210 2,823

Unemployment insurance .......................... 56 57 58 59 75 79 75 73 65 64 66 67 347 681

Other retirement ........................................ 8 9 10 11 12 12 13 13 14 14 16 17 57 130

Excise taxes ....................................................... 72 79 88 99 104 106 112 120 136 142 150 159 509 1,216

Estate and gift taxes ......................................... 7 11 13 23 25 27 29 32 34 37 39 42 117 301

Customs duties .................................................. 30 31 33 36 38 39 41 44 46 48 50 52 188 428

Deposits ofearnings, Federal Reserve System 83 81 80 61 46 36 36 38 40 42 43 45 260 468

Other miscellaneous receipts ........................... 20 24 21 52 68 71 74 77 83 89 95 101 286 729

Total receipts .............................................. 2,303 2,469 2,902 3,215 3,450 3,680 3,919 4,153 4,379 4,604 4,857 5,115 17,167 40,274

Deficit .................................................................... 1,300 1,327 901 668 610 649 612 575 626 658 681 704 3,440 6,684Net interest ....................................................... 230 225 248 309 390 483 565 631 692 748 798 850 1,996 5,715

Primary deficit/surplus () ........................ 1,070 1,102 654 359 219 166 47 56 67 90 117 146 1,445 969

On-budget deficit ............................................... 1,367 1,394 945 695 629 673 634 601 647 667 686 701 3,576 6,877

Off-budget deficit /surplus () .......................... 67 67 43 27 19 24 22 25 21 10 5 4 136 193

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A Renaissance View of Deleveraging