I was going to remark on the latest fizzled public pension reform in Illinois, with a warning from Fitch Ratings about their credit rating sinking even lower…but then this caught my eye:
If Congress does not agree to raise the debt limit, thus making it possible for the federal government to borrow again once the current $16.4 trillion limit is hit, the federal government will only be able to pay about 60 percent of its bills.
Now, debt is not always a bad thing – when you've got some kind of capital improvement project and want to spread out paying for that project over its lifetime, it can make sense and is not overly risky. You pay for it over the period of time you're getting use of it.
Also, say you're in the situation where your income is lumpy, or growing rapidly – you can put some on the credit card now because sometime in the future is when you've got the money.
How much of that federal spending is on capital improvements such as roads or military equipment? How much is on current operations?
And how much of it is pure cash transfers?
Let's take a look at the report that says only 60% of the federal government's bills could be paid:
To make it simple, I'm going to round. So from Feb 15 to Mar 15, an inflow of $277 billion and an outflow of $452 billion. Let's look at their scenario #1:
…wait, $86 billion out of the $452 billion, or almost 20% of those outflows, are giving back money that the federal government borrowed interest-free from individuals. Think about that the next time you feel happy about getting a tax refund.
This can show a little about the "lumpiness" of the income/outflow of the federal government and why we have this timing on the debt ceiling… but we also have this issue with regards to tax inflows, because employment isn't even over the year, and some high income people (like myself) hit the salary cap for FICA…and then there's bonus season (and about 50% of those are withheld)…well, it can make the cashflow management situation interesting.
Under option #1, by the way, here is what wouldn't be paid:
So, what in here might possibly be capital improvement projects?
Hmmm. Well, none of that first $277 billion would qualify, that's for sure. In the second list, there may be some subset of:
- Defense vendor payments (building jets, guns, etc)
- Dept of Education (if any of that goes to building schools)
- HHS grants (if it goes into building stuff, buying furniture, etc)
- Other (highways, etc)
So as an over-estimate, at most $133 billion of the $452 billion are capital expenditures. That's 30%. As a super-duper upper bound. So no matter what, there are absolutely current operational expenses going on the national credit card, as it were.
Now, when is that extra income going to come in to pay for those operational costs?
For the longest time, the feds could play this game because of the Boomers – they could lavish benefits and expenditures on the prior generations because there were so many Boomers that were paying for these goodies, and they were going to be paying taxes for decades.
Well, the Boomers are getting old. The oldest Boomers are already drawing on Medicare and Social Security benefits. The peak birth year for the Boomers was 1956, so those folks have yet to pass through the magic age points of 62 (when they're eligible to take Social Security old age benefits – will happen in 2018) and 65 (year 2021), but it's coming up fast.
And then there's Medicaid – Obamacare is supposed to boost those payments as well.
So those outflows are supposed to grow – and grow faster than the tax base.
Cutting items such as defense spending can help in the fiscal short run, but according to the above numbers, defense spending ($47 billion, which includes veteran benefits) is already dwarfed by generational wealth transfer ($61 billion just for Social Security… ignoring Medicare/Medicaid…which is even bigger than SocSec).
So yes, cobble together some crap sandwich of a fiscal deal, DCites, but the specter of "nondiscretionary" spending is not going away.