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1
How To – and How Not To –
Solve the U.S. Fiscal Crisis
Michael H. Granof
The University of Texas
Key Themes
• We’re in serious trouble; need
fundamental reforms
• U.S. of 2012 is not the same as U.S. of
1950
• Problems are “holistic” – We’re a nation of
intergovernmental, corporate and not-for-
profit interdependences
• No way to grow our way out
• Eliminating “fraud, waste and abuse” won’t
do it
.
2
Key Themes
• To solve our long-term problems we first
have to solve the short-term ones
• We’re going to have to make critical
choices as to public vs. private goods
• Most popular remedies may, at best, solve
one problem, but will likely exacerbate
others
3
Difference between budget and net cost
per financial statements
4
Difference between budget and net cost
per financial statements
5
How reliable are the numbers
6
Government’s net position
7
Percent of Debt Held by the Public
Owned by Foreigners (1987-2010)
This slide taken from a presentation by Robert Bixby, as part of the Concord Coalition’s “Fiscal Solutions” Tour (February 9, 2011, Austin TX) Source: United States Treasury Department, Treasury Bulletin, Table OFS-2, December 2010.
Per
centa
ge
of
Ow
ner
ship
of
Publi
cly-H
eld D
ebt
8
Where the Money Goes
9
Statement of net cost
10
Primary deficit projections
11
Primary deficit projections
12
Projection of Deficits
13
Projections of long-term debt
14
Change in Net Position
15
Statement of Social Insurance
16
Statement of Social Insurance
17
Statement of Social Insurance
18
OASDI Will Run Out by 2036
19
Part A as a % of GDP
20
Part A will run out by 2024
21
Part B and D – transfers in
dollars
22
Part B and D as % of GDP
23
Why Projections May Be
Unrealistic
24
Why Projections May Be
Unrealistic
25
Contingencies
• Pension Benefit Guarantee Corp.
– $250 B (vs.$190 B in 2010)
• Federal Deposit Insurance Corp.
– $16.5B (vs.$34.2 B in 2010)
• Fannie Mae and Freddie Mac
– $316B (vs. $360 B in 2010)
26
Other Concerns
• Consumer Debt -- $2.4 trillion ($7,800 per
capita), excluding real estate
• Decline in manufacturing– 25% of GDP in
early 1980’s to 11% today
• Focus on financial sector (2.1% of GDP in
1950 vs. 8.4% today)
• Trade deficit – improved owing to
recession by still larger than it ever was
before 1999
27
Truth and Consequences:
Balanced Budget Amendment
• Economic “Theory”
• Cash vs. Accrual Basis
• Capital vs. Operating Budget
• Budget vs. nonbudget costs
• Budgeted vs. Actual Costs
28
Truth and Consequences:
Reduce Educational Expenditures
• Secondary Education – OECD Ranking
Out 34 countries U.S. Ranks:
– Reading – 14th
– Science – 17th
– Mathematics – 25th
• Post Secondary
29
Truth and Consequences:
Devolve Costs to States
• 27-32% of state revenues come from the
federal government
• State revenues continue to Improve (grew by
6.1% in 3rd quarter of 2011) but have not yet
offset losses of the recession
• But recovery is slow
• Increasing Medicaid enrollment (8.5% in
2010)
• Pension and OPEB remain a major threat
30
29 States Face Shortfall for
Fiscal 2013
31
Truth and Consequences:
Reform State Pensions -- $1 Trillion+ Gap
32
Truth and Consequences:
Switch to Defined Contribution Plans
• Defined contribution plans are more
efficient that defined benefit plans
• Average 401K balance of employees in
their 60s with more than 30 years with
employer is only $210,457
33
Truth and Consequences:
Other Pension Reforms – Low Hanging
Fruit
• Eliminate Spiking
• Eliminate Early Retirement
• Eliminate Double-Dipping
• Improve Accounting
34
Truth and Consequences:
Reduce Compensation of Public
Sector Employees • No question but that public sector wages are less
than those of the private sector
• Controversy is how to measure benefits
– Retiree health benefits are more prevalent in the
public sector
– Public sector workers have greater job security
– Defined benefit plans provide a guaranteed return
• On balance private sector wages are 4% greater Source: Comparing Compensation: State-Local Versus Private Sector
Workers (Center for Retirement Research at Boston College,
September 2011)
35
Truth and Consequences:
Cut Expenses on Infrastructure • Aviation D
• Bridges C
• Dams D
• Drinking water D−
• Energy D+
• Hazardous waste D
• Inland waterways D−
• Levees D−
• Public parks and recreation C−
• Rails C−
• Roads D−
• Schools D
• Solid waste C+
• Transit D
• Wastewater D−
Source: The American Association of Civil Engineers’ 2009 Report Card for America’s
Infrastructure
36
Truth and Consequences:
Other Potential Measures
• Meaningless gestures such as federal pay
freeze
• Accounting gimmicks (including off-the
balance sheet borrowing)
• Focus on issues of no financial
consequence
37
What Can Be Done?
Reform Health Care • Health care represents 18% of economy
• Increased last year at a rate of 9%
• Average Annual Cost for Family Policy is $15,000
• Major impact on corporate and even university costs
• Potential Reforms
– Eliminate Medicare abuse
– Reduce administrative costs
– Encourage switch to electronic records
– Improve delivery of services
– Provide patient incentives for cost reduction
38
What Can Be Done?
Reform tax code
• Simplify
• Review all “tax expenditures”
• Raise (lower) rates???
• Increase tax rates when impact on
investment or consumer demand will be
negligible (Short-term)
• Provide incentives for research,
investment and hiring (Short-term)
• Develop targeted stimulus programs
(Short-term)
39
What Else Can Be Done?
• Acknowledge that government has to be
part of any solution
• Reform political system
40