1

How To – and How Not To –

Solve the U.S. Fiscal Crisis

Michael H. Granof

The University of Texas

Key Themes

• We’re in serious trouble; need

fundamental reforms

• U.S. of 2012 is not the same as U.S. of

1950

• Problems are “holistic” – We’re a nation of

intergovernmental, corporate and not-for-

profit interdependences

• No way to grow our way out

• Eliminating “fraud, waste and abuse” won’t

do it

.

2

Key Themes

• To solve our long-term problems we first

have to solve the short-term ones

• We’re going to have to make critical

choices as to public vs. private goods

• Most popular remedies may, at best, solve

one problem, but will likely exacerbate

others

3

Difference between budget and net cost

per financial statements

4

Difference between budget and net cost

per financial statements

5

How reliable are the numbers

6

Government’s net position

7

Percent of Debt Held by the Public

Owned by Foreigners (1987-2010)

This slide taken from a presentation by Robert Bixby, as part of the Concord Coalition’s “Fiscal Solutions” Tour (February 9, 2011, Austin TX) Source: United States Treasury Department, Treasury Bulletin, Table OFS-2, December 2010.

Per

centa

ge

of

Ow

ner

ship

of

Publi

cly-H

eld D

ebt

8

Where the Money Goes

9

Statement of net cost

10

Primary deficit projections

11

Primary deficit projections

12

Projection of Deficits

13

Projections of long-term debt

14

Change in Net Position

15

Statement of Social Insurance

16

Statement of Social Insurance

17

Statement of Social Insurance

18

OASDI Will Run Out by 2036

19

Part A as a % of GDP

20

Part A will run out by 2024

21

Part B and D – transfers in

dollars

22

Part B and D as % of GDP

23

Why Projections May Be

Unrealistic

24

Why Projections May Be

Unrealistic

25

Contingencies

• Pension Benefit Guarantee Corp.

– $250 B (vs.$190 B in 2010)

• Federal Deposit Insurance Corp.

– $16.5B (vs.$34.2 B in 2010)

• Fannie Mae and Freddie Mac

– $316B (vs. $360 B in 2010)

26

Other Concerns

• Consumer Debt -- $2.4 trillion ($7,800 per

capita), excluding real estate

• Decline in manufacturing– 25% of GDP in

early 1980’s to 11% today

• Focus on financial sector (2.1% of GDP in

1950 vs. 8.4% today)

• Trade deficit – improved owing to

recession by still larger than it ever was

before 1999

27

Truth and Consequences:

Balanced Budget Amendment

• Economic “Theory”

• Cash vs. Accrual Basis

• Capital vs. Operating Budget

• Budget vs. nonbudget costs

• Budgeted vs. Actual Costs

28

Truth and Consequences:

Reduce Educational Expenditures

• Secondary Education – OECD Ranking

Out 34 countries U.S. Ranks:

– Reading – 14th

– Science – 17th

– Mathematics – 25th

• Post Secondary

29

Truth and Consequences:

Devolve Costs to States

• 27-32% of state revenues come from the

federal government

• State revenues continue to Improve (grew by

6.1% in 3rd quarter of 2011) but have not yet

offset losses of the recession

• But recovery is slow

• Increasing Medicaid enrollment (8.5% in

2010)

• Pension and OPEB remain a major threat

30

29 States Face Shortfall for

Fiscal 2013

31

Truth and Consequences:

Reform State Pensions -- $1 Trillion+ Gap

32

Truth and Consequences:

Switch to Defined Contribution Plans

• Defined contribution plans are more

efficient that defined benefit plans

• Average 401K balance of employees in

their 60s with more than 30 years with

employer is only $210,457

33

Truth and Consequences:

Other Pension Reforms – Low Hanging

Fruit

• Eliminate Spiking

• Eliminate Early Retirement

• Eliminate Double-Dipping

• Improve Accounting

34

Truth and Consequences:

Reduce Compensation of Public

Sector Employees • No question but that public sector wages are less

than those of the private sector

• Controversy is how to measure benefits

– Retiree health benefits are more prevalent in the

public sector

– Public sector workers have greater job security

– Defined benefit plans provide a guaranteed return

• On balance private sector wages are 4% greater Source: Comparing Compensation: State-Local Versus Private Sector

Workers (Center for Retirement Research at Boston College,

September 2011)

35

Truth and Consequences:

Cut Expenses on Infrastructure • Aviation D

• Bridges C

• Dams D

• Drinking water D−

• Energy D+

• Hazardous waste D

• Inland waterways D−

• Levees D−

• Public parks and recreation C−

• Rails C−

• Roads D−

• Schools D

• Solid waste C+

• Transit D

• Wastewater D−

Source: The American Association of Civil Engineers’ 2009 Report Card for America’s

Infrastructure

36

Truth and Consequences:

Other Potential Measures

• Meaningless gestures such as federal pay

freeze

• Accounting gimmicks (including off-the

balance sheet borrowing)

• Focus on issues of no financial

consequence

37

What Can Be Done?

Reform Health Care • Health care represents 18% of economy

• Increased last year at a rate of 9%

• Average Annual Cost for Family Policy is $15,000

• Major impact on corporate and even university costs

• Potential Reforms

– Eliminate Medicare abuse

– Reduce administrative costs

– Encourage switch to electronic records

– Improve delivery of services

– Provide patient incentives for cost reduction

38

What Can Be Done?

Reform tax code

• Simplify

• Review all “tax expenditures”

• Raise (lower) rates???

• Increase tax rates when impact on

investment or consumer demand will be

negligible (Short-term)

• Provide incentives for research,

investment and hiring (Short-term)

• Develop targeted stimulus programs

(Short-term)

39

What Else Can Be Done?

• Acknowledge that government has to be

part of any solution

• Reform political system

40