How To and How Not To Solve the U.S. Fiscal Crisis/media/Files/MSB...•Eliminating “fraud, waste...

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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

.

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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

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Difference between budget and net cost

per financial statements

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Difference between budget and net cost

per financial statements

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How reliable are the numbers

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Government’s net position

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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

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Where the Money Goes

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Statement of net cost

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Primary deficit projections

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Primary deficit projections

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Projection of Deficits

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Projections of long-term debt

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Change in Net Position

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Statement of Social Insurance

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Statement of Social Insurance

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Statement of Social Insurance

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OASDI Will Run Out by 2036

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Part A as a % of GDP

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Part A will run out by 2024

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Part B and D – transfers in

dollars

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Part B and D as % of GDP

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Why Projections May Be

Unrealistic

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Why Projections May Be

Unrealistic

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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)

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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

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Truth and Consequences:

Balanced Budget Amendment

• Economic “Theory”

• Cash vs. Accrual Basis

• Capital vs. Operating Budget

• Budget vs. nonbudget costs

• Budgeted vs. Actual Costs

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Truth and Consequences:

Reduce Educational Expenditures

• Secondary Education – OECD Ranking

Out 34 countries U.S. Ranks:

– Reading – 14th

– Science – 17th

– Mathematics – 25th

• Post Secondary

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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

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29 States Face Shortfall for

Fiscal 2013

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Truth and Consequences:

Reform State Pensions -- $1 Trillion+ Gap

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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

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Truth and Consequences:

Other Pension Reforms – Low Hanging

Fruit

• Eliminate Spiking

• Eliminate Early Retirement

• Eliminate Double-Dipping

• Improve Accounting

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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)

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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

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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

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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

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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)

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What Else Can Be Done?

• Acknowledge that government has to be

part of any solution

• Reform political system

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