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Worried About The Size of The Federal Debt? There’s Another Number That Should Really Scare You.

Fat Chance - Banks Take Responsibility for the Financial Crisis by Michael Smith via Flikr

Fat Chance - Banks Take Responsibility for the Financial Crisis by Michael Smith via Flikr

$53 trillion.

More than THREE TIMES the entire federal debt.

According to Saturday’s New York Times, that’s the amount of money currently held by US-based “too-big-to-fail” financial institutions.

“Too-big-to-fail” has been around for a while.  It dates back to the Reagan administration’s takeover of Continental Illinois National Bank and Trust Company, which was then the seventh-largest US bank.

And it’s been a growing problem ever since.

Here’s why: “TBTF” distorts the economy.  In theory, in a capitalist economy, there should be a relationship between risk and reward.  In theory, people who can’t afford to lose their money will chose “safe” investments, even though they have a lower rate of return; and even those people who can afford to lose money will take fewer risks.

But that’s only in theory.  In reality, TBTF has separated “risk” from “reward”.  The financial industry is now operating on the belief that if the loss is big enough, the government will step in.

It’s sort of like insurance… only, the financial industry doesn’t have to pay for it.

A year and a half ago, one Federal Reserve Bank economist estimated the TBTF effect is worth between $450 and $900 billion a year.

“The existence of the implicit subsidy enabled these companies to become larger and more complex than otherwise would have been the case. TBTF institutions respond to the subsidy by increasing their risk through either engaging in riskier activities or increasing their leverage. While these actions may be privately optimal, the response to the TBTF subsidy is not socially optimal, as it can pose huge risks to the financial system.”

(Gotta love that economist-speak…“Not socially optimal,” indeed.)

Even since the 2007 Wall Street meltdown, financial institutions have continued to take advantage of their TBTF status.  TBTF institutions are still getting bigger and taking more risks.  Here’s how Forbes described the situation last year:  “Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks.”

And now, a half-decade after the bailout, the TBTF institutions are worth $53 trillion.

So why am I comparing the size of the financial industry with the size of the federal debt?

I was trying to figure out the current level of taxpayer exposure, in this “not socially optimal” arrangement.  In other words: if the financial industry implodes again, how much government money is it going to cost us?  And I figured the best way to figure that out was to look at what happened in the most-recent TBTF bailout.

As near as I could figure, from what’s easily available on the Internet: back before the 2007 meltdown, TBTF institutions were worth a total of about $2 trillion.  The 2008 bailout bill appropriated $700 billion to deal with the crisis — or, roughly one-third of the total value of TBTF institutions, before they started to fail.

The federal budget was already running a deficit.  That means: in order to fund the bailout, Congress had to borrow an amount equal to one-third of the pre-crisis value of those TBTF institutions (using my “as near as I can figure” estimate).

But those TBTF institutions are bigger now; and that means if they fail, any federal government bailout would need to be bigger, too.

TBTF are now worth $53 trillion. Do the math.  If there is another Wall Street meltdown; and another bailout; and this next bailout also requires the government to borrow an amount equal to one-third of what TBTF institutions are worth now…

Well…one-third of $53 trillion is…almost exactly the current amount of the federal debt.

In other words, the next financial meltdown could double the national debt.

Are you scared yet?

“Negotiate” means talking about ALL options

Federal Revenue Sources as percentage of GDP

Golly.  The GOP still hasn’t figured out what’s driving the federal debt?  Let’s try… lack of revenues.

Federal revenues, as a percentage of the country’s economy, are at the lowest point since Harry Truman was President.  (And that was before Congress enacted Medicare, and added Medicare payroll taxes to the federal revenue mix.)

Corporate taxes, in particular, are at record-low levels.  (Just look at the olive-green areas on this graph.)

Federal Revenue Sources as percentage of GDP

The GOP insists on “concessions” from President Obama, in exchange for not driving America’s economy totally off the cliff.

They are insisting on cuts to Social Security and Medicare before they will consider acting on the debt limit.  “My goal here is to have a serious conversation about those things that are driving the deficit and driving the debt up,” according to House Speaker John Boehner.

But will they discuss restoring revenues, as a way of cutting the deficit?  Not a chance, the GOP says.

Wow.

Is Speaker Boehner really contemplating a “conversation”?  (Or is he just expecting the Democrats to surrender?)

————

See the data I used in my graph here.

Translating from TeaPartyese: What “negotiate” really means

Federal Tax Revenues as Percentage of GDP

Stahlwille ratchet head (1/2 SQ)Don’t let them fool you.

When GOP Congressmen say they “just want to negotiate” – what they’re really saying is “we’re going to have it our way”.

And when they talk about “compromise” – they’re really talking about “ratcheting it down even further.”

You know how a ratchet works, right?  When you turn it, the screw can only go one way.  And the Tea Party’s position is: government can only get smaller.

They’re yelling about the federal deficit – and accumulated federal debt – but the only “solution” they’re willing to entertain is to cut spending.  Have you heard anybody suggest raising revenues, lately?

The fact is: as a share of the nation’s economy, federal tax revenues are at almost-record lows. Yes, they were lower, back when Harry Truman was President – but that was before Medicare was enacted in 1965.

Federal Tax Revenues as Percentage of GDP

And it looks like the GOP may have already won the federal budget game.

Remember 2011, when House Budget Committee Chairman Paul Ryan came out with his budget“$4 trillion of cuts over decade

Remember how radical that budget seemed, back then?  How far to the right?  How extreme the cuts appeared?

Now, take a closer look at the “continuing resolution” passed by the Democratically-controlled Senate last week, in a last-ditch effort to avoid the government shutdown.

Yeah, the same “continuing resolution” that the House GOP won’t send to an up-do-down vote, without further concessions.

Funding levels in that “continuing resolution” are about 10% less than what Chairman Ryan proposed, back in 2011.

And it came from the Democrats.

And it’s still not enough for the GOP.

Ratchet, ratchet, ratchet.

—————————————

Read more about how the Senate’s continuing resolution compares to the Ryan budget here.

See the tax revenue data that my chart is based on here.

 

 

 

Social Security: 78 years (and counting)

Social_Security_45th_Anniversary

Seventy-eight years ago today, President Franklin Roosevelt signed the Social Security Act with this statement:

“Today a hope of many years’ standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last.”

That was almost eight decades ago. Now, almost 90% of Americans age 65 or older receive Social Security. Almost half of those people would be living in poverty, if they did not receive Social Security benefits.

“This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness.”

Today, the Social Security Trust Fund has $2.7 trillion in assets. The “Old Age and Survivors Insurance” program is expected to have an annual surplus at least through 2020 (and only after 2020 would it need to dip into the Trust Fund to pay benefits).

The irony here is that President Roosevelt expected Social Security to “lessen the force of possible future depressions” and prevent the federal government from having to go “deeply into debt to furnish relief to the needy” during economic crises.

But instead, the program was used to help the federal government absorb the cost of the Bush tax cuts.

Today, we are at the decision-making point that Alan Greenspan predicted 10 years ago: either the Bush tax cuts need to (finally) end, or the government is going to have to “cover the $1 trillion price [of the tax cuts] by trimming future benefits in Social Security and other entitlement programs.”

Today, the Social Security program is under attack like never before. (Watch for my next post, about the GOP’s revived “Penny Plan”.)

And President Roosevelt’s assumption that the federal government would go “deeply into debt to furnish relief to the needy” during “possible future depressions”?

Looks to me like that’s just history.

————

Really worth reading, if you have a few more minutes: Tax attorney Paula Singer’s column “Social Security is a model, not a failure, for Washington budgetmaking.”

If Congressman Ryan Could Save $161 Billion A Year, Would He? The Answer May Shock You

Rights_by_OnTask_Flikr

DSC_9969Tax Credits or Spending? Labels, but in Congress, Fighting Words

The New York Times has a story about Washington lobbyists’ effectiveness in convincing Congress to pass tax breaks that benefit the wealthy.

Just one of those tax breaks – capital gains and dividends – costs an estimated $161 billion a year.  That would pay not just for the Sequester cuts, but also for all the additional cuts that House Budget Committee Chairman Paul Ryan wants to make in next year’s federal budget.

No surprise, the top 1% get 75% of the benefit of that particular tax break.  (The bottom 60% of taxpayers get only 1% of the benefit.)

Another way to look at it?  The amount the 1% gets from the unearned income tax break – just in a single year – would pay for 10 years of Paul Ryan’s cuts to Medicare.

Read the story here.  Dig into the graphic here.

If you haven’t already, read Sunday’s post about corporate tax breaks.

Wondering why you should take the time to learn about this?  The next few budget battles are going to come down to questions of revenue versus cuts, and corporate welfare versus Social Security and Medicare.  Basically, it’s going to be a question of whose interests our government will serve:  the people who can afford to hire lobbyists? Or the very tired and distracted middle class?

The House GOP is still marching to the same drummer they have been following since 2001.  Nothing much is going to change in Washington, unless we the people work to change it.

The one video every Republican, Democrat and Independent must see!!!

March 21, 2013 rally at Portsmouth Naval Shipyard


More than 200 people rallied at the Portsmouth Naval Shipyard yesterday to rally against the budget cuts known as “sequestration”.

At the same time they were rallying, Congress passed a bill to make most of those cuts permanent.

That bill – the “continuing resolution” to fund the federal government for six months – also rescinded a long-planned increase in pay for federal workers. Read Congress Adds Insult to Injury!

The continuing resolution was crafted to protect military contractors from the effects of sequestration – at the expense of federal employees, including Portsmouth Shipyard workers. Read more about Sen. Kelly Ayotte’s defense of defense contractors here.

As Portsmouth Shipyard worker John Joyal told the crowd yesterday:

The men and women at that shipyard over there – every single day, they put their politics aside, their gender aside, their religion aside, their ideological beliefs aside, you name it, they put everything aside to go perform the people’s business.

“That flag right there does not belong to the right-wing of the GOP of our Congress, that flag belongs to the American people. What the US Congress needs to do is, they need to grow up, put their differences aside, go into a room and perform the people’s business just like the people on this island do, every single day.

There are other options. Ending special corporate tax breaks would pay for the sequester cuts twice over. Ending tax breaks on unearned income would pay for the sequester cutsplus everything the House GOP wants to cut from next year’s federal budget.

Is this the best six-month budget that our Congress can come up with?

The Magical Math of Boehner’s Congress: tax cuts don’t ‘cost’ anything

House Speaker John Boehner

House Speaker John Boehner
Another thing to remember, as you’re watching the Fiscal Cliff standoff:

When John Boehner was first elected Speaker of the House of Representatives, he changed the Rules.

Yes, the actual Rules that the House uses to structure debate on pending legislation.

One of those changes tells you a lot about Boehner’s priorities.

Boehner decreed that the House would not consider any additional federal spending without an identified “offset”.  For example, in order to increase spending on Medicaid, the House would have to “offset” that spending through cuts to other programs (for example, by cutting Food Stamps).

chart of factors contributing to federal debt

BUT – Boehner decided that tax cuts would be exempt from this. Under Boehner’s Rules, Congress could pass any tax cut proposal without having to “offset” – or even consider! – the revenue cost of the legislation.  [And yes, the Bush tax cuts are specifically mentioned, and specifically exempted from any Congressional consideration of their cost.]

In other words, under Boehner’s Rules, Congress will not add a dime to the deficit through increased spending.

But Congress can increase the deficit by any amount, as long as the money is being “spent” on tax cuts.

Yes, for more than a decade, our country has been borrowing to pay for the Bush tax cuts.  And under Boehner’s Rules, Congress can increase the deficit as much as it wants – as long as the borrowed money is paying for tax cuts, not spending.

Boehner’s “Magical Math” sheds a different light on the Fiscal Cliff “negotiations”, doesn’t it?

Fiscal Cliff: Who is “entitled” to what?

Washington Post Poll September 11 2001

Something else to remember, as you’re watching news coverage of the Fiscal Cliff negotiations:

The tax rates that GOP Congressional leaders are trying so hard to defend are relatively recent – and the public has never supported them.

Washington Post Poll September 11 2001Just months after the first round of tax cuts was passed, in 2001, a Washington Post poll found that 57% of Americans wanted to roll back the tax cuts in order to preserve the federal budget surplus. (Yes, we had a surplus, back then.)

There’s more:

President Bush’s budget director had just warned congressional Republicans that “it was likely the government would tap the Social Security surplus this year, contradicting what he had been saying only a few weeks earlier.”

That same Washington Post poll found that “an overwhelming 92 percent of those surveyed said they opposed using Social Security funds” for things other than retirement benefits.

That was in 2001. Two years later, it was clear that the first round of Bush tax cuts hadn’t “jump-started” the economy – so the White House pushed through another round. This time, the bill had so little support it almost didn’t pass the Senate. GOP stalwarts John McCain, Lincoln Chafee and Olympia Snowe all voted against it. The Senate split 50-50 – and Vice President Dick Cheney cast the deciding vote.

That’s right… Dick Cheney was responsible for passing the tax cuts that House Speaker John Boehner is now trying so hard to defend.

“Entitlements”?

In recent weeks, Speaker Boehner has been talking about tax cuts for the wealthy as if they’re somehow sacred. He doesn’t seem to care what he has to sacrifice, to protect those high-income taxpayers.

Speaker Boehner is insisting on cuts to “entitlement programs” such as Social Security, Medicare and Medicaid – before he will agree to any fiscal cliff “compromise”.

And if taxes are going to be raised – well, guess who Speaker Boehner expects to pay the price? Here’s Senate President Harry Reid’s analysis of Speaker Boehner’s latest proposal, earlier today:

“Their proposal would raise taxes on millions of middle-class families,” Reid said on the Senate floor. “Their plan to raise $800 billion in revenue by eliminating popular tax deductions and credits would reach deep into pockets of middle-class families.”

Speaker Boehner wants to cut “entitlements”?!

The working families of America have paid into the Social Security system for decades, expecting to get benefits back when we retire.

High-income taxpayers owe their low tax rates to former Vice President Dick Cheney.

Who, exactly, should be entitled to what?

Read more about the fiscal cliff here.

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