24 April 2013 D E B T AND THE D O C T O R

BEFORE WE BEGIN... I’m not trying to convince you of anything. The context is American but the implications are much broader than that. I am not an expert! Am I biased? You bet I am!

HOW DEBT WORKS Personal Debt

HOW DEBT WORKS Public Debt

“Government is the great fiction by which everybody endeavours to live at the expense of everybody else.” DEBT AND JUSTICE

“Government is the great fiction by which everybody endeavours to live at the expense of everybody else.” DEBT AND JUSTICE

It’s not right to use government to put your burden on someone else. Fair Shares at a Point in Time DEBT AND JUSTICE

Fair Shares Over Time Fair Shares at a Point in Time It’s not right to use government to put your burden on someone else. DEBT AND JUSTICE

Will future persons be able to pay, and at what cost ? Is it fair to ask future persons to pay? Are we, and they, getting good value ?

THE PLAN 1.What is the Debt? 2.Why Worry About Debt? 3.What Causes Debt to Grow? 4.How Can Debt Be Controlled? 5.Discussion

1. WHAT IS THE DEBT? Where Does Public Debt Come From? Revenue (smaller) Revenue (bigger) Revenue (equal) - Spending (bigger)- Spending (smaller)- Spending (equal) = Deficit= Surplus= Balanced Budget

1. WHAT IS THE DEBT? Where Does Public Debt Come From? Last yearThis yearNext year Revenue (smaller) Revenue (smaller) Revenue (smaller) - Spending (bigger)- Spending (bigger)- Spending (bigger) = Deficit= Deficit= Deficit DEBT

1. WHAT IS THE DEBT? What Gets Counted as “The Debt”? As of 15 April 2013: GROSS DEBT$16.8 trillion INTRAGOVERNMENTAL DEBT$ 4.8 trillion PUBLIC DEBT$ 12 trillion UNFUNDED OBLIGATIONS? Better treated under the topic of spending Source: US Dept. of the Treasury

1. WHAT IS THE DEBT? What Gets Counted as “The Debt”? As of 15 April 2013: GROSS DEBT$16.8 trillion INTRAGOVERNMENTAL DEBT$ 4.8 trillion PUBLIC DEBT$ 12 trillion Borrowed money to be paid back with taxes later Source: US Dept. of the Treasury

1. WHAT IS THE DEBT? What Gets Counted as “The Debt”? By end of 2018 (est.): GROSS DEBT$21.7 trillion INTRAGOVERNMENTAL DEBT$ 5.7 trillion PUBLIC DEBT$ 16 trillion Borrowed money to be paid back with taxes later Source: White House Office of Management and Budget table 7.1

1. WHAT IS THE DEBT? Is This a Lot of Debt?

1. WHAT IS THE DEBT? Is This a Lot of Debt? It is high enough to be historically very significant: “Debt has exceeded 70 percent of GDP during only one other period in U.S. history: from 1943 through 1951, when it spiked (peaking at 109 percent of GDP) because of a surge in federal spending during World War II.” Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

World War II2013 US PUBLIC DEBT AS % GDP Australia Source: table (Australia)

World War II2013 US DEFICITS AS % GDP Source: table 1.2

US DEFICITS IN 2005 DOLLARS Source: table 1.3 World War II2013

THE PLAN 1.What is the Debt? 2.Why Worry About Debt? 3.What Causes Debt to Grow? 4.How Can Debt Be Controlled? 5.Discussion

5 Trade-offs of Debt Caveats: These are net effects Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter WHY WORRY ABOUT DEBT?

5 Trade-offs of Debt Caveats: These effects are not time-equal “Generations born after about 2015 would be worse off if action to stabilize the debt-to-GDP ratio was postponed from 2015 to People born before 1990, however, would be better off if action was delayed, largely because they would partly or wholly avoid the policy changes needed to stabilize the debt.” Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT? 5 Trade-offs of Debt Caveats: These effects are not time-equal “Generations born after about 2015 would be worse off if action to stabilize the debt-to-GDP ratio was postponed from 2015 to People born before 1990, however, would be better off if action was delayed, largely because they would partly or wholly avoid the policy changes needed to stabilize the debt.”

2. WHY WORRY ABOUT DEBT? Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT?

Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT?

Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT?

Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT? Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT?

Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT? Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT? Source: Congressional Budget Office, The 2012 Long-Term Budget Outlook, chapter 2

2. WHY WORRY ABOUT DEBT?

What about Interest? 2012: Public Debt:$ 12 trillion Interest Payment:$220 billion Approximate Rate:1.8 % More than 6% of all spending, and about 9% of all revenue Almost 1/3 of all national defense spending in 2012 More than Education, Training, Social Services, Employment, & VA combined Source : table 6.1 (interest payment & total outlay), table 7.1 (debt), table 1.1 (revenue), table 3.1 (breakdown of outlay)

2. WHY WORRY ABOUT DEBT? What about Interest? 2012: Public Debt:$ 12 trillion Interest Payment:$220 billion Approximate Rate:1.8 % Rates of interest on public debt have been extremely low. For instance, it was about 6.12% in At a similar rate in 2012, interest would have been over $734 billion. Source : table 6.1 (interest payment), table 7.1 (debt)

INTEREST ON PUBLIC DEBT Source : table 6.1 (interest payment), table 1.3 (revenue); (debt)

2. WHY WORRY ABOUT DEBT? What about Interest? 2012: Public Debt:$ 12 trillion Interest Payment:$220 billion Approximate Rate:1.8 % At the moment, rates are fairly steady. But rates change. With a large debt, what do such changes look like? Source : table 6.1 (interest payment), table 7.1 (debt)

2. WHY WORRY ABOUT DEBT? What Difference Would Higher Interest Rates Make? 2012: point: Public Debt:$ 12 trillion$ 12 trillion Interest Payment:$220 billion$336 billion Approximate Rate:1.8 %2.8 % An extra $116 billion in interest would have been paid. A 53% increase in paid interest, and more than was spent on Education, Training, Employment, & Social Services combined – just in extra interest. Source : table 6.1 (interest payment), table 7.1 (debt), table 3.1 (breakdown of outlay)

EFFECT ON INTEREST PAYMENTS OF EACH PERCENTAGE POINT Sources : table 7.1 (debt), table 3.1 (breakdown of outlay), table 1.1 (revenue); (GDP).

2. WHY WORRY ABOUT DEBT? Source:

2. WHY WORRY ABOUT DEBT?

THE PLAN 1.What is Debt? 2.Why Worry About Debt? 3.What Causes Debt to Grow? 4.How Can Debt Be Controlled? 5.Discussion

3. WHAT CAUSES DEBT TO GROW? What Do We Mean, “Causes”? We might mean: How did deficits come to be so large? Public debt went from 40% of GDP in 2008 to 54% in 2009 & climbing “Perfect Storm” Less RevenueMore Spending Decline in GDPGeneral increase Smaller share of GDP Wars Stimulus bill

3. WHAT CAUSES DEBT TO GROW? What Do We Mean, “Causes”? We might mean: How did deficits come to be so large? We might mean: Why are deficits still so hard to manage?

3. WHAT CAUSES DEBT TO GROW? What Do We Mean, “Causes”? We might mean: How did deficits come to be so large? “Altitude” We might mean: Why are deficits still so hard to manage? “Attitude”

3. WHAT CAUSES DEBT TO GROW?

Revenue Revenue Revenue - Spending- Spending- Spending = Deficit= Deficit= Deficit DEBT There are only 3 possibilities: Revenue is too small Spending is too big Some combination of the two See also p. 4

3. WHAT CAUSES DEBT TO GROW? I think this is the answer, and clearly so. There are only 3 possibilities: Revenue is too small Spending is too big Some combination of the two

3. WHAT CAUSES DEBT TO GROW? I think this is the answer, and clearly so. But that still leaves a question: Is this chiefly a revenue problem or chiefly a spending problem ? There are only 3 possibilities: Revenue is too small Spending is too big Some combination of the two

3. WHAT CAUSES DEBT TO GROW? This is where things get very controversial. Remember, I’m not here to convince you of anything! But obviously, I do have a view. Is this chiefly a revenue problem or chiefly a spending problem ? There are only 3 possibilities: Revenue is too small Spending is too big Some combination of the two

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? Because this is considered a political issue, the CBO doesn’t make a verdict. However, they do controlled thought experiments—called “projections”—that can be used to determine what sorts of policy approaches are sustainable. Their 2012 projection was particularly revealing...

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The CBO focused on the 4 main areas that bear on the budget:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The CBO focused on the 4 main areas that bear on the budget: MANDATORY SPENDING Spending that Congress can alter only if they change the law

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The CBO focused on the 4 main areas that bear on the budget: MANDATORY SPENDING DISCRETIONARY SPENDING Spending that Congress can alter in preparing a budget, without having to change any laws

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The CBO focused on the 4 main areas that bear on the budget: MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE Taxes etc. Historically 18% of GDP

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The CBO focused on the 4 main areas that bear on the budget: MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE Unexpected disasters, financial crises, military conflicts, etc. etc.

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? Then they made some assumptions: MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLowerHigher Rising GDP Rising share of GDP Stable

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? Then they made some assumptions: MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLowerHigherStable Best-Case Scenario for Mandatory Spending

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? A PROJECTION IS NOT A PREDICTION! MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLowerHigherStable Best-Case Scenario for Mandatory Spending

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? Why focus on mandatory spending? MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLowerHigherStable Best-Case Scenario for Mandatory Spending

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? Why focus on mandatory spending? (1) It is, after all, mandatory. So the first question is whether the problem is in the law or just in the budget. (2) It is the majority of all spending.

MANDATORY & DISCRETIONARY SPENDING, 2012 Trillions of 2012 Dollars Source: table 8.5 (mandatory), table 8.7 (discretionary)

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? Why focus on mandatory spending? (1) It is, after all, mandatory. So the first question is whether the problem is in the law or just in the budget. (2) It is the majority of all spending. (3) It is the part of spending that is growing.

GROWTH IN MANDATORY & DISCRETIONARY SPENDING AS % GDP, Source: table 1.3 (revenue), table 8.5 (mandatory), table 8.7 (discretionary); (GDP).

3. WHAT CAUSES DEBT TO GROW? MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLowerHigherStable Best-Case Scenario for Mandatory Spending Source:

Historically high debt

3. WHAT CAUSES DEBT TO GROW? MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE Constant Includes scheduled Medicare cuts that are not actually expected to occur Lower … as % GDP than since the 1930s Higher 21%-24% of GDP, new historic high (70-year high: 21%) Assumes no impact on GDP growth Stable Obvious

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLower As low as 5.5% GDP, vs. the 40-year avg. of 8.5% Higher About 19% of GDP over the next decade Assumes no impact on GDP growth Stable Source:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): “If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $845 billion, or 5.3 percent of gross domestic product (GDP), its smallest size since In CBO’s baseline projections, deficits continue to shrink over the next few years, falling to 2.4 percent of GDP by Source:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): “Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. Source:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): “Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. Source:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): “Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. Source:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): “Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. Source:

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? The most recent update (February 2013): “As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. By 2023, if current laws remain in place, debt will equal 77 percent of GDP and be on an upward path, CBO projects.” Source:

3. WHAT CAUSES DEBT TO GROW? DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE ConstantLowerHigherStable Even under implausibly favorable conditions everywhere else, there would still be historically high levels of debt

3. WHAT CAUSES DEBT TO GROW? MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE

3. WHAT CAUSES DEBT TO GROW? MANDATORY SPENDING DISCRETIONARY SPENDING EVERYTHING ELSE Source: table 1.3 (revenue); (marginal rates)

SPENDING VS. REVENUE % GDP 15.4% GDP 15.8% GDP Source: table 1.3 (revenue), table 8.5 (mandatory), table 8.7 (discretionary)

SPENDING VS. REVENUE % GDP Source: table 1.3 (revenue), table 8.5 (mandatory), table 8.7 (discretionary)

3. WHAT CAUSES DEBT TO GROW? MANDATORY SPENDING REVENUE EVERYTHING ELSE Source: table 8.7 (discretionary)

GROWTH IN MANDATORY & DISCRETIONARY SPENDING AS % GDP, Source: table 1.3 (revenue), table 8.5 (mandatory), table 8.7 (discretionary); (GDP).

3. WHAT CAUSES DEBT TO GROW? Is it a Revenue Problem or a Spending Problem? MANDATORY SPENDING DISCRETIONARY SPENDING REVENUE EVERYTHING ELSE

THE PLAN 1.What is Debt? 2.Why Worry About Debt? 3.What Causes Debt to Grow? 4.How Can Debt Be Controlled? 5.Discussion

4. HOW CAN DEBT BE CONTROLLED? There are Only 3 Possibilities: Systemic Overhaul of Revenue Systemic Overhaul of Spending Both Why “systemic”?

4. HOW CAN DEBT BE CONTROLLED? Source: table 1.3 (revenue, spending, & deficit), table 2 (tax), "Growing Unequal? Income Distribution and Poverty in OECD Countries," OECD 2008 (progressivity).

4. HOW CAN DEBT BE CONTROLLED? Source: table 1.3 (revenue, spending, & deficit), table 2 (tax), "Growing Unequal? Income Distribution and Poverty in OECD Countries," OECD 2008 (progressivity).

"Growing Unequal? Income Distribution and Poverty in OECD Countries” Organisation for Economic Cooperation and Development, 2008 Ratio of tax share among the wealthiest 10% to their share of market income

4. HOW CAN DEBT BE CONTROLLED? Source: table 1.3 (revenue, spending, & deficit), table 2 (tax), "Growing Unequal? Income Distribution and Poverty in OECD Countries," OECD 2008 (progressivity).

4. HOW CAN DEBT BE CONTROLLED? Source: table 2.

4. HOW CAN DEBT BE CONTROLLED?

Option 2: Systemic Overhaul of Spending Most of mandatory spending is for healthcare and pensions These are growing The trustees of these programs report they are not sustainable, even with the cost-containment measures already provided for in the law So if the debt is to be handled via spending, we must fundamentally change how people receive these services

4. HOW CAN DEBT BE CONTROLLED?

THE PLAN 1.What is Debt? 2.Why Worry About Debt? 3.What Causes Debt to Grow? 4.How Can Debt Be Controlled? 5.Discussion

24 April 2013 D E B T AND THE D O C T O R