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The Economic Tipping Point

Are we past the tipping point for economic reform? I would argue that Obama’s budgets and spending accelerated the deficits beyond repair. Some people will go back to Reagan and say that the deficit and the debt ballooned during the Reagan Administration and they will blame it on his tax cuts. But what is actually true is that the tax cuts generated a large increase in revenue, and the only reason why he had deficits was that the Democrat-led Congress increased spending even over the increased revenue. The same thing happened with the Bush tax cuts which were very pro-growth; the revenue went up sharply, but spending went up even faster. But at this point the debt was still manageable.

Then you come to Obama. At the beginning of his administration, we had the deep recession -which arguably could have benefited by one year of stimulus. The concept of a stimulus is supposed to be a one-off event. In other words, you engage in big one-time expenditures to get the economy on track and then spending goes back to previous levels as the recovery occurs. The problem is that  Obama didn’t put things in for just one year. He did long term things, like food stamps, teacher’s compensation, etc.,  knowing full well that once put into effect they could not easily be withdrawn. And it was pretty clearly his intent all along, for political reasons, to bake them into the budget.  So now when we started to have a recovery, you had ballooning deficits — even with a growing economy. Then by the time Trump was elected, the locked-in recurring spending with its locked-in annual increases made the deficit – and the debt – almost impossible to rein in.  

Now we have the pandemic and we have no place to go. There’s no surplus to go to the deficit. Millions of Americans are unexpectedly unemployed, which means they’re not paying into Social Security. At the same time, we see older workers who have lost their jobs choose to draw their benefits as soon as they become eligible. This will speed up the insolvency train. But then Trump did something that was very stupid (though his political motivation is clear). He said that entitlements are off the table. If entitlement reform is off the table at this point, we’re headed to bankruptcy. 

We’ve been talking about the coming insolvency of the Social Security and Medicare programs for many, many years now and Congress has done nothing to stave off the inevitable. Couple that with Obama budgets, Trump’s lack of action, and the pandemic, and the deficits are even larger now. Anyone seriously looking at the situation knows that absent a major change to entitlements, the mandated annual increases, both because of cost of living adjustments and demographics, will bankrupt both programs in the next ten to fifteen years. It’s very safe to say that absent major entitlement reform, we’re basically past the tipping point. 

Massive Deficit Accumulating

The Trump Administration is on the path to rack up a trillion dollar deficit for fiscal year 2018-2019, due to a combination of declining total tax revenues and administrative overspending.

The federal government collected a record $1,521,589,000,000 in individual income taxes through the first eleven months of fiscal 2018 while corporation income tax collections and total federal tax collections were in decline.

Trump needs to work on cutting spending in order to reduce the massive deficit he has accumulated this past year. It wasn’t good when Obama did it and it’s not good that Trump is doing it.

Government Surplus in January, Still Running Overall Deficit

From CNSNews.com, the monthly deficit/surplus roundup:

The federal government this January ran a surplus while collecting record total tax revenues for that month of the year, according to the Monthly Treasury Statement released today.

January was the first month under the new tax law that President Donald Trump signed in December.

During January, the Treasury collected approximately $361,038,000,000 in total tax revenues and spent a total of approximately $311,802,000,000 to run a surplus of approximately $49,236,000,000.

Despite the monthly surplus of $49,236,000,000, the federal government is still running a deficit of approximately $175,718,000,000 for fiscal year 2018. That is because the government entered the month with a deficit of approximately $224,955,000,000.

The $361,038,000,000 in total taxes the Treasury collected this January was $11,747,870,000 more than the $349,290,130,000 that the Treasury collected in January of last year (in December 2017 dollars, adjusted using the Bureau of Labor Statistics inflation calculator).

The Treasury not only collected record taxes in the month of January itself, but has now collected record tax revenues for the first four months of a fiscal year (October through January).

So far in fiscal 2018, the federal government has collected a record $1,130,550,000,000 in total taxes.

However, despite the record tax collections so far this fiscal year, and despite the one-month surplus in January, the federal government is still running a cumulative deficit in this fiscal year of $175,718,000,000.

That is because while the Treasury was collecting its record $1,130,550,000,000 in taxes from October through January, it was spending $1,306,268,000,000.

The levels of federal taxes and federal spending fluctuate from month to month, and it is not unusual—but not always the case—for the federal government to run a surplus in January.

Over the last twenty fiscal years, going back to 1999, the federal government has run surpluses in the month of January 13 times and deficits 7 times. Six of the Januaries in which the federal government ran deficits overlapped President Barack Obama’s time in office—including January 2009, the month Obama was inaugurated, and the Januaries in 2010, 2011, 2012, 2014 and 2016.

The federal government also ran a deficit in January 2004, when President George W. Bush was in office.

According to an analysis published on Dec. 21 by the New York Times, a “majority of provisions” in the tax law President Trump signed in December would “go into effect” in January. However, according to the Times’ analysis, February “is the earliest that most will see changes in their paychecks.”

The Internal Revenue Service released its new withholding tables, based on the tax-cut law, on January 11.

“The Internal Revenue Service today released Notice 1036, which updates the income-tax withholding tables for 2018 reflecting changes made by the tax reform legislation enacted last month,” the IRS said that day in a press release. “This is the first in a series of steps that IRS will take to help improve the accuracy of withholding following major changes made by the new tax law.

“The updated withholding information, posted today on IRS.gov, shows the new rates for employers to use during 2018,” said the IRS release. “Employers should begin using the 2018 withholding tables as soon as possible, but not later than Feb. 15, 2018. They should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.”

The record total federal taxes the Treasury has collected in the first four months of this fiscal year have included $606,726,000,000 in individual income taxes; $75,533,000,000 in corporation income taxes; $371,931,000,000 in Social Security and other payroll taxes; $27,738,000,000 in excise taxes; $7,550,000,000 in estate and gift taxes; $12,634,000,000 in customs duties; and $32,637,000,000 in miscellaneous other receipts.

$587 Billion Deficit for 2016

The fiscal year for 2016 ran from October 1, 2015 – September 30, 2016. According to the Treasury Department statement of receipts and outlays, the government had:

  • $3.267 trillion in tax revenue
  • $3.584 trillion in outlays
  • $587 billion deficit

Receipts came from several sources:

Individual Income Taxes: $1.546 trillion
Social Security and Other Payroll Taxes: $1.115 trillion
Other Taxes and Duties: $306 Billion
Corporate Income Taxes:$300 Billion

Outlays were comprised of several groups:

Social Security $916 Billion
Defense: $595 Billion
Medicare: $595 Billion
Interest on Debt: $241 Billion
Other: $1,507 Billion

You can view the entire report here

US Pension System Woes

The Financial Times reviewed data recently that suggested that the US public pension system is in dire straits; the funding shortage is likely 3 times as large as what is being reported. The estimated deficit is $3.4 trillion.

The solutions for the funding shortfalls are grim: either raise taxes or cut spending; unfortunately the “cut spending” approach always goes to the essential services first, so that taxpayers feel the heat and will consider a tax hike instead.

US Congressman Devin Nunes recently noted that, “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.” Nunes has “put forward a bill to the House of Representatives last month to overhaul how public pension plans report their figures.” He added: “When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out.”

Insolvency has already been observed in San Bernardino, California and Detroit, Michigan, largely due to mismanagement of pension funding and budget shortfalls. The Financial Times noted that “Chicago, Dallas, Houston and El Paso have the largest pension holes compared with their own revenues”, as well as the states of Illinois, Arizona, Ohio, and Nevada.

Research done by Stanford paints a difficult future: “Currently, states and local governments contribute 7.3 per cent of revenues to public pension plans, but this would need to increase to an average of 17.5 per cent of revenues to stop any further rises in the funding gap.”

And more: “Several cities and states, including California, Illinois, New Jersey, Chicago and Austin, would need to put at least 20 per cent of their revenues into their pension plans to prevent a rise in their deficits, while Nevada would have to contribute almost 40 per cent.”

Much of the problem lies in the fact that retirement costs and liabilities have consistently been calculated on a 7%-8% return , which is not particularly realistic, as has been demonstrated in recent years during the economic downturn.

There is no way this silent funding crisis will get any better — and until localities recognize and admit their crisis and make ardent changes to their pension systems, it will only continue to worsen egregiously.