The Deficit Is Worse Than We Think

Once again I must credit the following to someone much smarter than myself. Therefore, I would like to acknowledge the author, Lawrence Lindsey, and The Wall Street Journal where the column was originally published. All I did was cut and paste.

The Deficit Is Worse Than We Think

Normal interest rates would raise debt-service costs by $4.9 trillion over 10 years, dwarfing the savings from any currently contemplated budget deal.

By LAWRENCE B. LINDSEY

Washington is struggling to make a deal that will couple an increase in the debt ceiling with a long-term reduction in spending. There is no reason for the players to make their task seem even more Herculean than it already is. But we should be prepared for upward revisions in official deficit projections in the years ahead—even if a deal is struck. There are at least three major reasons for concern.

First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.

The 10-year rise in interest expense would be $4.9 trillion higher under "normalized" rates than under the current cost of borrowing. Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.

To some extent this is a controllable risk. The Federal Reserve could act aggressively by purchasing even more bonds, or targeting rates further out on the yield curve, to slow any rise in the cost of Treasury borrowing. Of course, this carries its own set of risks, not the least among them an adverse reaction by our lenders. Suffice it to say, though, that given all that is at stake, Fed interest-rate policy will increasingly have to factor in the effects of any rate hike on the fiscal position of the Treasury.

The second reason for concern is that official growth forecasts are much higher than what the academic consensus believes we should expect after a financial crisis. That consensus holds that economies tend to return to trend growth of about 2.5%, without ever recapturing what was lost in the downturn.

But the president's budget of February 2011 projects economic growth of 4% in 2012, 4.5% in 2013, and 4.2% in 2014. That budget also estimates that the 10-year budget cost of missing the growth estimate by just one point for one year is $750 billion. So, if we just grow at trend those three years, we will miss the president's forecast by a cumulative 5.2 percentage points and—using the numbers provided in his budget—incur additional debt of $4 trillion. That is the equivalent of all of the 10-year savings in Congressman Paul Ryan's budget, passed by the House in April, or in the Bowles-Simpson budget plan.

Third, it is increasingly clear that the long-run cost estimates of ObamaCare were well short of the mark because of the incentive that employers will have under that plan to end private coverage and put employees on the public system. Health and Human Services Secretary Kathleen Sebelius has already issued 1,400 waivers from the act's regulations for employers as large as McDonald's to stop them from dumping their employees' coverage.

But a recent McKinsey survey, for example, found that 30% of employers with plans will likely take advantage of the system, with half of the more knowledgeable ones planning to do so. If this survey proves correct, the extra bill for taxpayers would be roughly $74 billion in 2014 rising to $85 billion in 2019, thanks to the subsidies provided to individuals and families purchasing coverage in the government's insurance exchanges.

Underestimating the long-term budget situation is an old game in Washington. But never have the numbers been this large.

There is no way to raise taxes enough to cover these problems. The tax-the-rich proposals of the Obama administration raise about $700 billion, less than a fifth of the budgetary consequences of the excess economic growth projected in their forecast. The whole $700 billion collected over 10 years would not even cover the difference in interest costs in any one year at the end of the decade between current rates and the average cost of Treasury borrowing over the last 20 years.

Only serious long-term spending reduction in the entitlement area can begin to address the nation's deficit and debt problems. It should no longer be credible for our elected officials to hide the need for entitlement reforms behind rosy economic and budgetary assumptions. And while we should all hope for a deal that cuts spending and raises the debt ceiling to avoid a possible default, bondholders should be under no illusions.

Under current government policies and economic projections, they should be far more concerned about a return of their principal in 10 years than about any short-term delay in a coupon payment in August.

Mr. Lindsey, a former Federal Reserve governor and assistant to President George W. Bush for economic policy, is president and CEO of the Lindsey Group.

No more Mr. Nice Guy...

".. this is war!"  (Mark Levin on his radio broadcast, Monday, June 27, 2001)

Mark is right.  To hell with all the 'play nice' rhetoric.  We - the conservative voters - need to pull the stops out and crush the opposition.  That pretty much covers the definition of war.

There are enough conservative Representatives in the House to keep the debt ceiling where it is.  It is time to play hardball - no compromises.  I live on a specific amount of income with which I am 'forced' to pay off my debts (mortgage, credit cards, car payment) first .. even before I get to go shopping for groceries.  It is time for the federal government to learn the meaning of the word budget.

from Econterms:  budget:  A budget is a description of a financial plan. It is a list of estimates of revenues to and expenditures by an agent for a stated period of time. Normally a budget describes a period in the future not the past.

Since we cannot pass a balanced budget amendment in time, the option of 'cutting up the credit card' will have to do.  It is time the government lived within its means.

The (sad) truth is…

Budgets do not come from the White House, they come from Congress.  The party that has controlled Congress since January 2007 is the Democrat Party.  That means they controlled the budget process for FY 2008 and FY 2009, as well as FY 2010 and FY 2011.  In that first year they had to contend with George Bush who, somewhat belatedly, got tough on spending increases and which caused them to compromise on spending.  However, for FY 2009 Nancy Pelosi and Harry Reid bypassed George Bush entirely by passing continuing resolutions to keep government running until Barack Obama could take office.  Once that had happened they passed a massive omnibus spending bill to complete the FY 2009 budgets.  Where was Barack Obama during this time?  Why he was a member of that very Congress, the one that passed all of these spending bills and, as President, he signed the massive omnibus bill to complete FY 2009.  Let's remember what the deficits looked like for the past 10 years:

If the Democrats inherited any deficit, it was the FY 2007 deficit, the last of the Republican budgets.  That deficit was the lowest in five years, and the fourth straight decline in deficit spending.  After that, Democrats in Congress took control of spending, and that includes (then Senator) Barack Obama, who voted for those budgets.  If Obama inherited anything in the way of a deficit, he inherited it from himself.  In a nutshell, what Obama is saying is “I inherited a deficit that I voted for and then, since becoming President, I voted to expand that deficit four-fold.”

a violent response?

While violence is never funny, I have to say that I am bemused by the media’s overhyped coverage of the ‘violent’ response to the passage in the House of H.R. 3490, the Patient  Protection and Affordable Care Act.

As a quick example, the Huffington Post apparently believes it is okay to portray Sunday's protesters as racist.  As we well know, the best way to diminish a group is to tar it with the actions of an individual.  However, while Representative Cleaver said someone spit on him (as far as I know, nobody actually filmed this and Rep. Cleaver himself was unable to identify the offender to the police) and both Representative Lewis and Senator Frank were offended by slurs shouted at them not a single act of physical violence occurred and there were no arrests.

Now, if it had been the left protesting capitalism…

Pittsburgh, September 24th, 2009 .. “A police report said at least 19 shops and banks, including many fast food restaurants, bagel shops and diners near the university, had their glass windows or doors smashed in.

Sixty-six people were arrested following the clashes on Thursday -- 24 during the disturbances in the afternoon and 42 overnight, police said.”

In fact, that was the results of the first day of protest and involved approximately 1000 protesters.  Contrast that with the “Tea Party” protesters outside the Capitol Building.  What was that saying?  Sticks and stones…

As I understand it, there was even less violence on Sunday than there was after the 2004 ALCS Red Sox win.  Go figure.

Altruism, the most noble of intentions

Have you ever watched someone who is reading a really good book? I mean really observed them. Perhaps you were in a library when you heard someone exclaim and looked up (obviously your book wasn’t as good as it could have been) to see a reader, oblivious to anyone else in the room, with an intense expression on their face. Maybe you sat down in an airport gate area and noticed a reader who didn’t look up when the flight was called for the second or third time. Whatever the case may have been, I know the next thing you did was try to see the title of their book. With any luck, you found a good book to read.

I know I’ve been that reader, lost in the story, literally woven into the fabric the author has crafted. Really good books are like that, sucking you in until it is almost irritating to return to the real world around you. Isaac Asimov’s Foundation series comes to mind, as do Anne McCaffery’s The Dragonriders of Pern series and Tom Clancy’s Jack Ryan stories. I can remember befriending the local bookstore proprietor so that I could be on the list of people for whom he reserved one of his limited copies of upcoming releases. The good old days of the corner bookstore. But I digress…

Over the past several years I have found myself reading less entertaining books such as Mark Levin’s Liberty and Tyranny, Niall Ferguson’s The Ascent of Money and Peter Schiff’s Crash Proof. However, I remain the reader who runs down to Barnes and Noble and picks up a book that has been turned into a movie so I can read it as the author intended before seeing a script writer’s perversion of the story. That is sort of how I discovered Terry Goodkind’s The Sword of Truth series.

In looking for something to watch on TV, I stumbled upon ABC’s Legend of the Seeker. I missed season one, but went back and caught up online after the first couple installments of season two. Then I saw an interview with the author, Terry Goodkind, and made it a point to pick up the first book in the series (Wizard’s First Rule). I was hooked. The next trip to the bookstore involved picking up book two and ordering books three through six. I just finished book six, Faith of the Fallen, and it is so relevant to today’s politics that I found myself reading paragraph sized excerpts of it to my wife and having to explain the back-story in the the process. She smiled indulgently through the whole exercise, bless her heart.

I understand that Goodkind describes himself as an objectivist and I will not pretend to know diddly about objectivism (perhaps that shall be my next path of inquiry). What struck me about the storyline in Faith of the Fallen was the socially destructive force of altruism. Goodkind seems to have taken the proverb ‘Hell is full of good intentions or desires’ and, quite literally, played it out in his story.

Now I find myself looking at the Obama administration's use of altruism to destroy the very fabric of the United States of America and constructing parallels to Goodkind's storyline in Faith of the Fallen. What scares me is that The Order was successful for hundreds of years and I see no reason why today's 'altruists' should fail in their efforts.

the Healthcare Summit

I find it both amusing and disconcerting to hear the President "moderating" the "discussion" since he has a vested interest in the outcome - passage of the 'compromise' bill.

The Democrats are obviously starting from the position that their bill is a starting position when, in fact, the only reason they are sitting at that particular table is because the 'compromise' bill is unacceptable to the American public. Period. End of story.

The Republicans are, yes, sitting there with props (such as the 2400 page 'compromise' bill) but they are, at least, addressing the individual issues. They are trying to keep the Overton window from being dragged left to encompass the Democrat's 'compromise' bill.

All that aside, I am not hearing a discussion that addresses the issues. Some of the most salient points are being ignored.

First, we need to know what insurance is, so let me see if I can define it:

• Insurance is an economic device utilized by individuals and organizations to protect themselves against the risk of realizing unforeseen and extraordinary financial losses.


• By purchasing an insurance policy from an insurance company, an individual or organization can transfer the financial risk of a potentially devastating loss to another party, the insurer.


• Essentially, insurance allows individuals and organizations to pay a scheduled and affordable fee - a premium - to an insurance company today, and, in turn, the insurance company makes a promise to protect that individual or organization financially if they suffer from a specified unforeseen and devastating economic loss in the future.

It is important to understand insurance is an economic device and not a right or a social entitlement. It is a business and can only function as a business. Medicare is not insurance. Medicare and Medicaid are social entitlements. They are bankrupt and are in the process of bankrupting the country at various levels. If Medicare and Medicaid were private businesses they would have long since failed and gone away.

Once you accept the difference(s), you have to accept the reality that health insurance is completely separate from Medicare and Medicaid. By lumping them together in a single bill (whether it is all three of them or just health insurance and Medicare) you are socializing health insurance - making it into an entitlement and removing it as an economic device. Health insurance will no longer be a business, it becomes a government controlled social program.

As it stands, the 'compromise' bill is cover for the Democrats and their desire to:

• remove health insurance from the business environment and converting it to a social program;
• use the premise of healthcare reform as cover to alter (I did not say reform) Medicare and Medicaid.

Toyota in the hot seat

I've been watching the House Energy and Commerce Committee hearings and I'm afraid Toyota is in more than the hot seat.

Before I excoriate Toyota, let me say that I have owned a Toyota vehicle for personal use since 1983. I don't lease, I buy .. in fact, I buy and hold. I have had my current vehicle for almost 12 years and have absolutely no regrets. That said, Toyota blew it - BIG TIME!

My background is computers and programming control systems. Suffice it to say I've been working with computers since the late '70s and I programmed control systems for 13 years. Based on the testimonies I heard this morning, Toyota has had a problem with their Electronic Control System (ECS) for years.

We used to call them AFEs (another f'ing engineer); kids who just graduated from college and knew everything there is to know about their (brand new) profession. They were tasked with the unenviable job of writing code for or designing systems that they truly didn't understand. This isn't really a problem in and of itself in, say, an accounting system, but when you are interfacing with the real world... oh boy.

Think of airplanes. For years, when 'fly by wire' first arrived on the scene, experienced pilots bemoaned not having "control" of the new planes. There were no "real" control systems; everything went through a computer. If you wanted to bank right, you turned the yoke to the right, the computer control system received the signal and then the computer sent the proper commands to the related physical systems to accomplish the turn. The yoke wasn't physically attached to anything but the computer. If the computer failed the whole thing would be nothing but a flying stone. That is why there are backup systems (3 in the Shuttles as I recall).

There are (probably) no backup systems in (Toyota) cars. I don't know this for sure since I am not into cars, but it makes sense since cars are a consumer item and the idea is to cut production costs so as to maximize profit. No, I am not saying that is a bad thing, that is just the way it works.

Anyway, my bet is that some AFE somewhere back up the line (if I understood the testimony I heard this morning, somewhere back as far as 2000) wrote at least part of the code that is currently used in the ECS. Because of it's age this code was and has been considered 'mature' and 'functional.' Oops. It probably has an intermittent bug. Happens all the time.

Since reverse engineering is costly and problematic, nobody ever bothered to test and verify the old code. Worse, since it was considered 'functional,' nobody ever rewrote it. (At least not until recently- ergo the 'flashing' of the ECS.)

Now, I know none of this for sure; I am speculating. It is, however, an 'educated' guess based on years of experience crafting, writing and troubleshooting control systems. If it was me, and I was working for Toyota and hearing about these problems for the first time it would come down to this:
1. Can I reliably reproduce the problem mechanically?

2. What is the common denominator between the various vehicles?

In the final analysis Toyota made a series of assumptions and you know what that means.