Following in Greece’s footsteps?

The drivebys and the “wise men” in DC and on Wall Street are tut-tutting about the mess in Greece. (Thom Tillis says his “ancestral homeland” could learn something from North Carolina.)  But all indications are that we will be right in the same spot if we keep going as we are.

Economist Jeffrey Dorfman wrote in Forbes that an important stat to consider is a nation’s debt-to-income ratio:

Some people hate the notion of comparing a country’s financial situation to a family, but I think it is useful in many cases with this being one of them. For a family, debt that exceeds three times your annual earnings is starting to become quite worrisome. To picture this, just take your home mortgage plus any auto, student loan, or credit card debt, then divide by how much you earn.

If the answer is two or less, you are in great shape. If you are between two and three, you are pretty normal. Over three and you probably are feeling some financial stress with debt payments absorbing much of your paycheck.

When we look at national debt as a percent of GDP, we see few signs of danger by this rule. Debt-champion Japan is over 180 percent, Greece is just under 150 percent, with Italy in third place at 109 percent. The U.S. is in eleventh place (out of 34) with debt equal to 61 percent of GDP.

Economists and central bankers know this is not the same as the family debt to income concept, which is why they warn of danger at the level of 100, 90, or even 70 percent depending on which economist you talk to or exactly how you define the total amount of debt. The reason for the different standard is that the government cannot claim all your income as taxes or we would all quit working (or emigrate).

[…] A better comparison is to examine each country’s debt to government tax revenue, since that is the government’s income. This also offers a better comparison because different countries have very different levels of taxation. A country with high taxes can afford more debt than a low tax country. Debt to GDP ignores this difference. Comparing debt to tax revenue reveals a much truer picture of the burden of each country’s debt on its government’s finances.

When I compute those figures, Japan is still #1, with a debt as a percentage of tax revenue of about 900 percent and Greece is still in second place at about 475 percent. The big change is the U.S. jumps up to third place, with a debt to income measure of 408 percent. If the U.S. were a family, it would be deep into the financial danger zone.

[…] This does not factor the several trillion dollars owed to Social Security, yet it includes the Social Security taxes collected. If Social Security taxes are not counted, the U.S.’s debt to income ratio rises to 688 percent (still in third place). This tells you something about the likelihood of increasing Social Security taxes in conjunction with declining Social Security benefits.[…] 

The Congressional Budget Office has even, um, *better* news:

Testifying in the U.S Senate yesterday, Congressional Budget Office Director Keith Hall warned that the publicly held debt of the U.S. government, when measured as a percentage of Gross Domestic Product, is headed toward a level the United States has seen only once in its history—at the end of World War II.

To simply contain the debt at the high historical level where it currently sits—74 percent of GDP–would require either significant increases in federal tax revenue or decreases in non-interest federal spending (or a combination of the two).

Historically, U.S. government debt held by the public, measured as a percentage of GDP, hit its peak in 1945 and 1946, when it was 104 percent and 106 percent of GDP respectively.

In 2015, the CBO estimates that the U.S. government debt held by the public will be 74 percent of GDP. That is higher than the 69-percent-of-GDP debt the U.S. government had in 1943—the second year after Pearl Harbor.

By 2039, CBO projects, the debt held by the public will increase to 101 percent of GDP and by 2040 to 103 percent GDP. At that point, Hall told the Senate Homeland Security and Governmental Affairs Committee, the “debt would still be on an upward path relative to the size of the economy.”

The U.S. Treasury divides the federal debt into two main parts: debt held by the public and intragovernmental debt. The debt held by the public includes Treasury securities such as Treasury bills, notes and bonds that are owned by individuals, domestic and foreign corporations, private banks, the Federal Reserve Bank, and foreign governments. The Treasury pays interest on this debt to those who own it. The intragovernmental debt is money the Treasury owes to government trust funds–such as the Social Security trust funds–because the government has spent money belonging to those trust funds (i.e. Social Security payroll taxes) on things other than what the trust fund was created to fund (i.e. Social Security).

As of July 9, according to the Treasury, the debt held by the public was $13,102,609,587,775 and the intragovernmental debt was $5,049,321,696,720. That equaled a total debt of $18,151,931,284,495.

While the run up in debt held by the public as a percentage of GDP in the 1940s financed a global war against Nazi Germany and Japan that ended with an allied victory, the current run toward unprecedented debt is based on projected increases in mandatory federal spending for entitlement programs. These include Social Security, Medicare, Medicaid and Obamacare subsidies.

“Mainly because of the aging of the population and rising health care costs, the extended baseline projections show revenues that fall well short of spending over the long term, producing a substantial imbalance in the federal budget,” Hall said in his written testimony.

“As a result, budget deficits are projected to rise steadily and, by 2040, to raise federal debt held by the public to a percentage of GDP seen at only one previous time in U.S. history—the final year of World War II and the following year,” he said.

“Moreover,” he said, “debt would still be on an upward path relative to the size of the economy. Consequently, the policy changes needed to reduce debt to any given amount would become larger and larger over time. The rising debt could not be sustained indefinitely; the government’s creditors would eventually begin to doubt its ability to cut spending or raise revenues by enough to pay its debt obligations, forcing the government to pay much higher interest rates to borrow money.”

Eventually, the nation would face a crisis—with wary investors demanding “much higher interest” rates to buy U.S. government debt.

“How long the nation could sustain such growth in federal debt is impossible to predict with any confidence,’ testified Hall. “At some point, investors would begin to doubt the government’s willingness or ability to meet its debt obligations, requiring it to pay much higher interest costs in order to continue borrowing money.

“Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country,” he said.

“Unfortunately, there is no way to predict confidently whether or when such a fiscal crisis might occur in the United States,” he said. “In particular, as the debt-to-GDP ratio rises, there is no identifiable point indicating that a crisis is likely or imminent. But all else being equal, the larger a government’s debt, the greater the risk of a fiscal crisis.”

Simply keeping things as-is will require even more money out of our wallets:

“Just holding federal debt at its current high level of 74 percent of GDP in 2040 would require significant changes in tax and spending policies,” Hall testified. “The combinations of increases in federal tax revenues and cuts in non-interest federal spending relative to current law of about 1.1% of GDP in each year for 25 years would be needed.

“In 2016, this would be a spending and/or a tax revenue increase totaling about $210 billion dollars–and then more than that in each year after that,” said Hall.

“If those changes came from increases of equal percentage in all types of revenues they would represent an increase of 6 percent relative to current law for each year between 2016 and 2040,” Hall testified.

“In 2016, for example, an average middle-income household would have to pay $750 more in taxes and more than that in each year afterwards,” he said.

“Or if the changes came from cuts of equal percentage in all types of non-interest spending, that spending each year would have to be 5.5 percent less than projected,” he said. “If the reduction was applied across the board to all types of non-interest spending, an average 65 years old in the middle of the earnings income who retires in 2016 would see a reduction of about $1,050 in his or her initial annual Social Security benefits—more than that in each year afterwards.”

“The more ambitious goal of returning public debt by 2040 to its average level over the past half century, which is 38 percent of GDP, would require more than that,” Hall said. “This would require a revenue increase and/or non-interest spending decrease totaling 2.6 percent of GDP every years.

“This means an average middle income household would have to pay $1,700 more in federal taxes in 2016 and larger amounts in subsequent years,” he said. “Or by cutting non-interest spending across the board, average Social Security benefits for a 65-year-old in the middle of the earnings distribution would have to drop by $2,400 in 2016 and by larger amounts in later years.”

In the wake of this *great* news, we get word that Thom Tillis is working to make sure you can get all of your federal welfare in addition to any state payments — like North Carolina’s eugenics payout — you are eligible for.  Congressman Patrick McHenry is pushing for said benefit to not be taxed. 

Fiddling while America burns, ladies and gentlemen.  Fiddling while it burns.