RKU Research

Uh... Guys? Are we going to like, do something?

We have recently crossed over an extremely scary threshold, and unless things turn around, things are going to get dicey.

Our Federal Government has promised to send out lots of monthly checks to people, which they now depend on. Up until now, the government has managed to scrape together enough cash send out the checks, and also pay for fun things like aircraft carriers, interstate roads, and big fancy buildings. What has happened, though, is that recently the entire Federal Government income is no longer enough even to finish sending out the checks. All the rest of everything is then funded by borrowing from lenders.

2009 Govt. Income	2010 Est. Benefit Checks
$2,198 Billion[10]	$2,393 Billion[16]

In other words, if we weren't borrowing money like a frat boy drinks beer, we would be running out of it before the check printing machine got to the V's. And we would have 0 dollars left to pay any federal workers, soldiers, FBI guys, or what have you. Everything would just... stop.

Why, that's just Rubbish. Our Ship is Un-Sinkable!

I'm sorry, Captain Smith, our cash reserves are pathetic, a mere 1/8th of the annual budget ($390 Billion[10]). Apparently, that includes[10] all the gold in Fort Knox.[20]   So since everything but the entitlement check money is borrowed, it means that if anything were to interrupt that flow of money from the lenders, it would be like hitting an an iceberg. The Titantic went down about two hours and forty minutes after the collision. The Federal Government with full tax revenue still flowing in could hold out for maybe a few months before the checks stop going out and workers went unpaid.

Quick, men! To the Pumps!

Another way to look at it is that we have already hit the iceburg. As the graph below (taken directly from the Jun 2010 Monthly Treasury Report) shows that they are borrowing 67% of their income. I.E. for every $3 they bring in, they are borrowing $2 so they can spend $5.

We Were Supposed to Have Ten Or Twenty Years Before All Hell Broke Loose!

For years there have been lots of vague warnings about the Baby Boomers and the coming crisis of health care costs etc etc. However, in recent years we've been faced with a perfect storm of an expensive war, expensive bailouts, and a recession.

Unemployment hits the Federal Government with a double-whammy. 81% [21] of its income comes from individual income tax. For each person who loses their job, the government loses that revenue, and on top of that, must pay unemployment benefits. So instead of just a leaky ship, we now have a ship with a gigantic hole in the side.

How Long Can This Go On?

We have established that the only thing keeping the Federal Government afloat right now is massive borrowing. Successful borrowing means you must have somebody willing to lend you money. Now the thing about lenders is, they hate to lose money. So when a country is so behind that they might not be able to honor their loan agreements, that country's credit gets downgraded. That credit downgrade quickly leads to ruin, since it is now even harder to borrow, but making the sitation worse. The death spiral starts, and all lenders flee. Nobody wants to be left holding the bag.

For Greece, the last straw was Standard and Poors downgrading their bonds to 'junk' status.

The answer is that nobody knows how long we can go on. It is completely dependent on the US economy, and the ability of our leaders to actually cut entitlements.

What Happens If Nobody Does Anything?

If the economy doesn't turn around dramatically, and our leaders do not cut entitlements, then we continue on the mad borrowing spree until our credit gets downgraded. Then our sitation gets worse and we get downgraded again, since at that point it will be too late to do anything but brace ourselves.

Eventually, it will be impossible to get any more loans. We will not get a bailout from the EU, nor any other country. We are just too big to save.

When it becomes impossible for the United States Government to borrow money, they will have to dramatically reduce the amount being sent to individuals, and make unthinkably drastic cuts in other spending.

To get an idea of what would happen in the country, what do you suppose 100 million people[29]  will do when the checks they depend on don't arrive, or arrive but are 1/2 of their normal size? Do you think that maybe one person in 50 might be mad enough to start running around in the streets, yelling and throwing things?

That would mean 1 or 2 million people running around in the streets, yelling and throwing things. Unlike Greece, we would have no bailout.

And If the Economy Takes Off Like a Rocket?

To see what happens if the economy starts growing at a fast, sustained rate, and unemployment drops way down, and wages go up up up, all you need to do is look at the current White House predicted budget figures.

It might be a little difficult to hit 4% growth rate for this year's GDP, since the last news report said we were at 1.6% growth. But look at the awesome growth we are going to experience in the next ten years! Oh, and see how our yummy, taxable incomes are going to rise, and unemployment will fall. It seems like the most awesome decade ever! If this comes to pass, our borrowing problems will be all gone, right?

Above is the predicted overall budget, assuming the optimal scenario as described in the previous excerpt. See how they predict that the government's income will double by the year 2017! Awesome!

But wait a second! It is really disappointing that the deficit does not go away. In fact, the national debt as a percentage of our GDP actually climbs up to a lofty 77.4%, and the deficit itself is 900 Billion dollars and rising. While this scenario has moved the time of reckoning forward, it is still leading to unsustainable debt levels, and the eventual catastrophe in the next downturn.

The Fiscal Commission

To deal with this issue, President Obama issued Executive Order 13531[33],  creating the National Commission on Fiscal Responsibility and Reform.

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By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows: Section 1. Establishment. There is established within the Executive Office of the President the National Commission on Fiscal Responsibility and Reform (Commission). The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Specifically, the Commission shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. The magnitude and timing of the policy measures necessary to achieve this goal are subject to considerable uncertainty and will depend on the evolution of the economy. In addition, the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government. Section 5.(a) No later than December 1, 2010, the Commission shall vote on the approval of a final report containing a set of recommendations to achieve the mission set forth in section 4 of this order.

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It will be interesting to see what they come up with. Will they suggest drastic cuts in entitlements and gigantic increases in taxation? And if they do, will congress implement their recommendations and pass it? Would the president sign it? To balance the budget by 2015 means coming up with $500 billion to a $1000 billion dollars per year, depending on how the economy grows. (The White House's rosy scenario has a budget deficit of $762 billion in year 2015)[32]

There are over 100 million people[29]  getting checks from the government, and about 100 million taxpayers[34]  providing the income. This means they must reduce the average entitlement recipient's benefit by $500 to $1000 per year, or else increase the taxes per taxpayer by $500 to $1000 per year. Realistically, they would probably have to do some of both, thus causing pain to 200 million Americans, or about 2/3 of the country. Is it possible for a majority of legislators to vote yes for this?

Conclusions

This march towards bankruptcy is not cool. We are a wealthy nation, and there is no reason for accumulating debt. If under even the most rosey scenario, we are still headed for catastrophe, then we have to conclude that our leaders are screwing this up. Politicians on both sides of the aisle have put us in a very vulnerable position because they could not resist the temptation of spending money they didn't yet have. If the economy takes off, we have some time to make changes. If the enconomy double-dips, then we are in a truly dire situation with perhaps no solution except financial collapse.

"...the federal government faces an unsustainable growth in debt."
Jan, 2010 - US Government Accountibility Office [1]

"...the Nation’s long-term fiscal trajectory is unsustainable..."
Jul, 2010 - WhiteHouse Office of Mgmt. & Budget [2]

"...growing budget deficits will cause debt to rise to unsupportable levels."
Jul, 2010 - US Congressional Budget Office [3]

"Welcome to the Recovery"
August 2, 2010 - TIMOTHY F. GEITHNER, US Treasury Secretary [22]

Have any questions or comments? Please feel free to

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[1] US Government Accountability Office -- Long Term Fiscal Outlook

[2] WhiteHouse OMB -- Budget of the US Government FY2011 Mid-Session Review

[3] US Congressional Budget Office -- FEDERAL DEBT AND THE RISK OF A FISCAL CRISIS

[4] US Federal Reserve -- Federal Reserve Chairman Ben Bernanke's Testimony before Congress

[5] US Treasury -- Monthly US Treasury Statement through June 30, 2010

[6] New York Times -- NYT news story on Greece Credit Downgrade from April 27, 2010

[7] New York Times -- NYT news story on Greece 2010 Riots May 5, 2010

[8] BBC News -- BBC News Story on European Union Bailout of Greece

[9] CIA Data -- Chart created from data from the CIA World Fact Book website

[10] GAO  -- Fiscal Year 2009 US Government Financial Report

[11] US Dept of Labor -- Federal Government Labor Statistics Page

[12] US Social Security Administration -- SSI Statistics Page

[13] US Dept of Labor -- Current data on Unemployment Rolls

[14] US Dept of Labor -- 2009 Detailed Budget Table - See pg 4 for Unemployment Appropriations

[15] Social Security Administration -- 2007 Annual Statistical Supplement.

[16] White House Office of Mgmt & Budget -- Total Outlays for Individuals by Cat. and Major Program 1940-2015

[17] US Office of Personnel Management -- 2007 Federal Civilian Workforce Fact Book

[18] US Library of Congress -- (Latest data from 2004) Military Background Compensation Papers - pg 50.

[19] US Census Bureau -- Government Employment and Payroll Page

[20] US Mint -- Fun Facts about the Gold Depository in Fort Knox

[21] Indv. inc Tax and Witholdings: $1775 Bln. Total Revenue: $2,198 Bln. 81%. Fiscal Year 2009 US Government Financial Report

[22] New York Times -- Aug 2, 2010 Op Ed by Timmothy Geitner, US Treasury Secretary

[23] IRS EITC website -- Total Earned Income Tax Credit Statistics. The EITC is a program to send checks to people with low incomes, as a negative tax. The IRS reports that in 2008, over 24 million people received an EITC check.

[24] Social Security Administration -- Social Security Program Statistics. The SSI administration reports that 58.5 million people received SSI benefits in July, 2010.

[25] USDA Supplemental Assistance Program -- Program Statistics data. The US Dept. of Agriculture reports that 33.5 million people received Supplemental Assistance in 2009.

[26] US Office of Personnel Management -- Federal Civilian Workforce Statistics In 2006, there were about 2.7 million federal workers receiving benefits. Whether this figure includes retired military personnel is not clear. The title of the document implies that these figures do not, while in the tables there are categories for Air Force, Navy, Army, etc.

[27] US Dept of Health and Human Servics -- Temporary Assistance for Needy Families and SSP In 2010, there were about 4.5 million families receiving assistance.

[28] US Dept of Labor -- Office of Unemployment Insurance In 2010, there were about 4.5 million unemployed people receiving federal benefits.

[29] Estimated Number of People Receiving Federal Benefits -- (in Millions) SSI: 58.5 [24] +  EITC: 24 [23] +  SNAP: 33.5 [25] +  TANF: 4.5 [27] +  UnEmp: 4.5 [28] +  Fed Retirement: 2.7 [26]  = 127.7 Million
Note that some individuals may receive more than one check, and therefore may be counted twice. (Since most Medicare Recipients would also be getting Social Security Checks, they are not included in the tally.) In addition, there are numerous other benefits not counted here because the numbers are smaller, including education benefits, veteran's benefits, coal miner's black lung benefits, and so on.
US Population: 310 Million.[30]  Percentage Receiving Benefits = 127.7/310 = 41%

[30] US Census Bureau-- US and World Population Clock US Population is over 310 million people.

[31] Snopes Article Sinking the Unsinkable

[32] White House OMB Document -- FY2011 Midsession Review

[33] White House Executive Order 15381 -- Executive Order 15381, creating the Fiscal Commission

[34] IRS Income Tax Statistics Size and Accumulated Size of Adjusted Gross Income The IRS reports than in 2008, there were 90,660,104 taxpayers who actually had taxable income. Since more than 80% of the Federal Government's income comes from individual income taxes, increasing revenue means increasing taxes on individuals.