What to Make of This?: US Deficits Far into the Future Edition

Keyser came across the following two graphs in a post elsewhere about how entitlements in the US (namely, Social Security, Medicare or medical treatment for old people, and Medicaid or medical treatment for the poor) are out of control and are set to devour the Federal budget and then the country (click the link for more graphs). Keyser has no idea whether the statistics that these projections are based on are true (and doesn’t it always seem that the future is worse than anyone predicted?), but let’s take them for granted. First, how much will this spending expand?

The first thing that struck Keyser about this was that the amount spent on Social Security as a percent of GDP is predicted to be pretty much constant at about 10%. How can this be? Isn’t the percentage of old people supposed to be increasing over time, as people live longer, women continue to have children at a later age, and the number of childless people increases? Unless the productivity of the shrinking proportion of the population that’s of working age increases constantly to make up for the shift in proportion from young to old, shouldn’t the percentage of GDP that winds up in the hands of SS recipients increase over time?

Basically, SS rides as a fixed percentage on top of a burgeoning amount of money spent keeping old people alive. Or rather dying. Keyser read once that Medicare spent a large amount of its money on people who would soon die, and a quick googling comes up with this:

Five percent of all Medicare patients die per year and spend almost 30 percent ($143 billion in 2009) of the Medicare budget. Medicare patients who die spend about six times more in their last year of life than those who do not, which comes to about $25,000 for each person who dies, compared with the almost $4,000 spent per year for those Medicare patients who do not die.

The guy who writes this claims that those dying cost about 10% of overall medical spending, the same amount as in the Netherlands, and he claims that you don’t necessarily know people are going to die, so there’s not much way to control this. Keyser can’t speak for the Netherlands but certainly all the Democrats who are promoting socialist medicine don’t explain that such systems are based on a centralized control of scarce medical resources, and the natural result of a shift to such a system would be spending less on old people. Certainly, here in Canada it’s hard enough to get certain treatments for anyone, and it’s harder for old people. About fifteen years ago, Keyser was having a discussion with his advisor about his retirement plans, and the advisor said that his wife wanted to move back to New Zealand, but he was against this because as an old person you couldn’t get kidney dialysis. No idea whether that’s directly true (struck Keyser as pretty harsh at the time), but it’s inevitable that limited resources have to be distributed in some way. Centralized government-run systems will make blanket decisions, including the reduction of services to old people. The system in the US basically supports old people at the expense of the young (thanks, AARP!), and the graph above is presumably based on extrapolations from the current increase in the percentage of the budget spend on the ailing retired population. Seemingly, the expectation is that the amount spent on this will double from about 3% of GDP to 6% in about twenty years. After that, the rate of increase goes up even more, going to 10% only a decade later and really taking off. Surely that isn’t sustainable in the long term.

So what’s the projected size of the Federal deficit, as the entitlements take over the budget?

First off, what’s “net interest”? That means interest that has to be paid to outsiders. Part of the scam of Social Security and medicare is that the systems have run surpluses since their inception, and these surpluses have been “invested” exclusively in US bonds. In effect, the surpluses have been used to fund (part of) the shortfall between receipts (taxes) and expenditure of the Federal government, the so-called “trust funds” of the entitlement programs in effect receiving IOU’s from the government, which of course has no “income” of its own apart from tax receipts. This is basically a way of shoving the cost of present expenditure onto the shoulders of future taxpayers, who will have to “pay” the entitlement programs interest for the privilege of the old surpluses having been used to fund the Federal spending of the past. Such interest transfers within the government are excluded from the calculation of the “net interest.”

At present, net interest is about $250 billion, which is 8% of the total budget, and as a percent of GDP doesn’t even register on the graph (it’s just a few percent). This explains to some extent why the seemingly huge deficit spending of the present year doesn’t make all that much difference. In the short term, adding a bit more to a small amount doesn’t matter.

Think of this as being like a credit card debt. You keep a balance out, but it’s not that much compared to total income. So you keep spending, and you never pay down your old debt. Eventually, this will add up (even if the interest rate is just a few percent, as is the case now). It’s really not until the late 2020′s that the figure becomes noticeable on the graph. But then the compounding of the vast size of the continually rolled over debt (that is, since the old bonds are never actually paid in full, but new bonds have to be issued to keep the old debt outstanding) becomes noticeable.

By about 2040, the net interest of the Federal government will be about 10% of GDP, and then it really takes off. By 2070, it’s 20% of GDP, and a decade after that it stands at 30%.

Does anyone imagine that this projection can really take place? Of course not. The market in US debt would collapse long before that point.

But it’s equally clear that in the short-term borrowing a lot more isn’t a problem. And in this case, the short term is at least a decade, if not longer.

This sort of perspective makes it clearer what’s going on in Washington. Anyone with a brain in his head will know that this can’t go on forever. But the moment of truth for such recklessness is so far in the distance that it can be totally discounted. (For what it’s worth, Keyser once read that people seriously discount future values, even if the equation is indisputable. If they have a choice between an expensive light bulb which will definitely save them more in the long term than they’d save by buying a cheaper lightbulb that uses markedly more power, most people will prefer to save the smaller amount now than buy the more expensive bulb and save later.) In any event, who knows? A meteor might destroy the earth before the inevitable financial crisis in the distant future, or (just as plausibly) someone will invent a way to make cars run on twinkies or some such stroke of genius that will make the economy increase so much that Obama’s massive debt will become chump change.

That may not be realistic, but such a pontentiality has as much “vividness” about it as the down-grading of US treasury bonds to junk-bond level in 2023. And in any event, Obama’s next election is in 2012, so all’s well!

So the inability of the political process to think logically or accept present pain or any but fairly immediate (or unavoidable) gain means that the present policy of attempting to have one’s cake and eat it too through borrowing will probably succeed for many years. But if you can short US treasuries in the 2020′s, that probably isn’t a bad idea…