Monday, July 18, 2011
Fiscal Suicide, Part II: A Swirling Motion
The debt "negotiations" are going on in a vacuum, with little detail about what is on the table for "spending reductions" or revenue enhancements. For example, on this process over the weekend (in Part I of this article), I gave a list of high-impact FY 2012 budgetary roll-off items that, if extended, would constitute actual spending increases over the baseline fiscal budget. Yet, nowhere does one hear about how these specific items will be treated. Everywhere you turn, it's all about rhetoric with nobody discussing any specifics. Among the rubber-meets-the-road issues, one to look for would be actual cuts, even small, for farm subsidies. Of course, this sets the stage for a murky and non-transparent headline when the debt ceiling is raised. This can be played as "saving the American way of life as we know it." The smoke-and-mirror trade is at heart attack level now, first with so-called stick saves of Greece, then a phony European bank stress test, and now a phony "debt ceiling" scam. There is not even the slightest effort at credibility anymore.
Meanwhile, back in the reality-is-not-an-option world, I should add one more ingredient to the mix: medicare outlays. We already know that any serious attempt to constrain this was quickly scuttled. Rep. Ryan's dead-on-arrival plan called for a simple freeze on Medicare in an attempt to stem the parabolic effects of a steady stream of new 65-years-and-older Americans. The second chart shows the reality of huge health inflation, even before the new crowd of recipients arrives. Therefore, this proposal (or lack of) would be essential for any credit agency evaluating the rating outcome. Even the second chart is likely to be optimistic, if the work force fails to expand and bring in a little premium growth. The Medicare gap therefore will be $350 billion in 2012, expanding afterwords.
Presumably even if there are inadequate cuts in terms of what the credit agencies need to see, at minimum the bull market in government income supports -- now 20% of personal income -- is over.
Another large question relates to Federal grants and aid to the states and localities. In order to achieve any kind of spending cuts that would even remotely turn back the tide on the overly optimistic FY 2012 budget, cuts must be made.The discussion has centered around some cuts in Medicaid of $100 billion over ten years. That may not seem like much except that costs are accelerating. Even the president's FY 2012 budget included cuts of nearly $50 billion in grants funded from discretionary appropriations, reflecting both the expiration of Recovery Act funding and new cuts to programs, such as Community Development Block Grants. Mandatory entitlements are on the block as well, with cuts in Medicaid matching reportedly being proposed by the administration in the Biden budget negotiations. The bull market (up $150 billion a year since 2007) in federal grants is over.
The NY Times quotes various Governors as anticipating more cuts in state funding. Additionally, when the US's rating is reduced, the rating agencies will also reduce the ratings for $130 billion munis with direct links to the US. Obama's Recovery Act stimulus program wrapped in June.
Even before the prospect in a break of endless Federal bailout money, Jefferson County looks to be near a Chapter 9 bankruptcy on $3.2 billion on bonds. Harrisburg, Penn., is in the brink with $300 million. There are incentives for sick localities to beat the stampede, quickly setting up a muni funding crisis. Back in January, I discussed the hardly heard real story: the big use of special authority revenue muni bonds. Instead, the apologists drone on and on about how tax-supported GOs rarely if ever default. Ok then.
On all fronts, this debt story feels like the swirling motion is starting. Even before the scheduled expiration of extended unemployment benefits at year end, some states are reducing benefit's length of time.