Federal Budget Deficit Rises With Payroll Tax Cut

I've written several times here at TDS warning about the dire state of the Social Security program and the reckless irresponsibility of President Hopey-Changey in cutting the payroll tax just to give the economy a short term boost and help his reelection chances. My previous writings on the subject are contained here:

Why We’re Screwed (Part 3): The Social Security “Trust Fund” is a Lie (July 13, 2011)

Social Security Blues: 2012 Shaping Up to Be a Third Consecutive Deficit Year (January 14, 2012)

Unfortunately, the lie about the supposed solvency of the Social Security program because trillions of dollars in payroll tax "surpluses" were allegedly squirreled away in the Social Security Trust Fund just won't die easily. If there really is all that money available in the fund, perhaps someone would care to explain away this story that appeared Tuesday in the USA Today:

The payroll tax cut recently enacted by Congress and signed by President Obama will increase the federal budget deficit this year, the Congressional Budget Office says.

What's more, the deficit is likely to be a little deeper than estimated in 2013 and 2014 as well.

The agency's latest report, which updates its forecast from January, shows a likely deficit this year of $1.2 trillion, rather than the $1.1 trillion originally projected. It shows the deficit declining to $1 trillion in 2013 and $953 billion in 2014, both a bit higher than January's forecasts.

Those gloomy figures are based on what CBO calls its "alternative fiscal scenario." Its basic projections are much rosier but are based on existing laws, rather than likely changes.

Because Congress and the White House are almost certain to extend expiring tax cuts and avoid Medicare payment cuts to doctors, for instance, the alternative scenario becomes more likely.

Most of the changes in the report are due to the extension of the 2-percentage-point payroll tax cut through the end of this year.

You really don't have to be a genius or a savant to figure out that if the Social Security trust fund really existed, then the payroll tax cut would not be adding to the current federal deficit. The sad fact is that your "leaders" used a quarter-century's worth of payroll tax surpluses to hide the true size of the federal deficit during that whole time period. Now the bill is on the table, and the diner has nothing in his pockets but lint and IOUs.


Bonus: "You just sat there taking everything you could get...you never dreamed that one day you might have to pay for it"

Great Recession Porn: Economic Crisis Slows U.S. Population Growth

As it turns out, a bad U.S. economy is not conducive to robust U.S. population growth. Here is the USA Today with the details:

The U.S. population is growing at the slowest rate since the Great Depression after two decades of robust increases.

For two consecutive years since 2009, the population has grown just 0.7% a year, down from annual increases around 1% in previous years and the lowest since the late 1930s. The U.S. gained 2.2 million people from 2010 to 2011 — fewer than the 2.8 million added a decade earlier — reaching a total of 311.6 million.

"Almost anybody who observes these things over the years can say this is almost all recession-related," says Carl Haub, demographer for the Population Reference Bureau.

The government says the recession ended in June 2009. Although the economy has improved, the downturn's effect on birth and immigration lingers. The number of babies born from July 1, 2010, to July 2011 dropped 200,000 from the same period in 2008-09. The number of additional immigrants fell 150,000.

"It's an indicator of an unhealthy economy," Haub says. "People are obviously still delaying births, and immigration has continued to drop because job opportunities are not there."

The U.S. fertility rate — which has been close to the replacement level of 2.1 children per woman in contrast to many developed nations that are well below that level — now is estimated to have fallen to 1.9, says demographer Joseph Chamie, former director of the United Nations Population Division and more recently research director at the Center for Migration Studies.

Putting aside the looming collapse of our economy for a moment, long term this portends a real disaster for an aging population which expects to be supported by government programs post-retirement. Demographics were already working against the long term solvency of Social Security and Medicare even before the downturn hit.

Though the article doesn't say so, I would gather that a large percentage of those delaying having children are the sons and daughters of the middle class who have not been able to find the types of secure employment that would allow them to settle down and raise a family. Which means the trend is doubly bad because it is the middle class that pays the lion's share of the overall taxes in our society.

Nevertheless, somehow despite this very bad news hope still springs eternal:

Demographers expect population growth to pick up when the economy rebounds fully, but a bounce-back in births is likely to lag.

"Many — but likely not all — of the postponed births can be expected to be made up," Chamie says. "Even with the slight current downturn in births, the U.S. population will very likely reach 400 million midcentury."

There it is again, that completely faith-based belief that real economic growth just HAS to resume, because in always has in the past. The demographers would do us all a much better service if they would instead devote some time studying what the effects would be if economic growth DOESN'T resume. Because that is the reality we all face and the one for which we need to start basing our planning for the future.


Bonus: "I think I'm sophisticated 'cause I'm living my life like a good homosapien. But all around me everybody's multiplying 'till they're walking round like flies, man"

The Great Muddle

image: downtown Freeport, Illinois...courtesy Wikipedia Commons

In what should have come as a surprise to precisely no one, it was reported this past week that the Republican congressional “leadership” has backed down on President Obama’s request to extend the payroll tax cut. I’ve posted before that I believe gutting the already-insolvent Social Security program’s designated revenue stream is exceedingly bad public policy, so I’m not going to beat that particular dead horse yet again.

Instead, I’d rather discuss a different aspect of this story—why exactly it is that after riding the Tea Party Tsunami to regaining control of the House of Representatives last year, the Republican Party since then has backed down on every single “fight” it has taken up with a president who was supposedly mortally wounded politically. The only such engagements the Republicans can claim to have “won” since their victories in the midterm elections are those in which President Hopey-Changey backed down before the battle was even joined—on freezing federal employee salaries for instance (indicating, of course, that doing so actually fit the Obama agenda, even if you will never convince his die hard supporters of that fact). From the multiple federal government shutdown threats, to raising the debt ceiling, to creating the utterly ineffectual deficit reduction commission, to extending the payroll tax cut, when push came to shove the Republicans, for all of their tough guy rhetoric, blinked every single time.

The pattern by now is so clear that it should be obvious to all but the most addle-minded of observers. When it comes to the economy, conventional left-versus-right politics no longer exists in America. Instead, policies which enable extend and pretend to carry on a bit longer will ALWAYS win the day, no matter which party is nominally pushing them. Whether they consciously realize it or not, most politicians across the political spectrum instinctively know that nothing will effectively end their careers faster than enacting legislation that can be directly attributable to setting off the next round of economic collapse.

This is why the Democrats, and Obama in particular, have resisted calls from the likes of Paul Krugman to greatly increase government deficit spending above its already insane levels in order to “jump start” the economy. The result of such madness would quickly be $200 oil and $7-a-gallon gasoline, and a crash in the consumer economy that would make 2008 look like a boom year by comparison.

On the other side of the aisle, the Republicans, for all of their bashing of “out of control" federal spending, have scrupulously avoided pushing through any form of genuine austerity programs such as the ones in fashion now all over Europe. Doing so would also result in another huge economic crash, just a deflationary one rather than an inflationary one.

Back on July 29th of last year, in my post, "GDP Checkmate – Four Choices of the Apocalypse" in the run up to the "last minute" agreement to raise debt ceiling, I wrote that our “leaders” were backed into a corner and faced with having to make one of four choices. It’s pretty clear now that they have chosen Option 2:

2). Raise the debt ceiling and MAINTAIN current levels of deficit spending. This would probably be Obama’s first choice to get him past Election Day 2012. This option would achieve results similar to those above, but it would take a little longer to get to hyperinflation and economic ruin, most likely at some point in Obama’s second term.

Anyone who thought the politicos would act any differently made the mistake of thinking that they really mean what they say whenever they open their mouths. In reality, Option 2 was their only real choice, given that their whole existence is staked in the system as currently constituted. The alternative is an economy resuming its free fall and the voters placing the blame squarely upon any incumbent they can vent their wrath against the next time around at the ballot box.

In closing, regarding my prediction that Option 2 would likely push back the day of economic reckoning until sometime in Obama’s second term, I see no reason six months after I first made that assertion to alter that time line. The Great Muddle will continue on…until one day some event beyond the control of the politicos rocks the system sufficiently to kick off the next phase of collapse.


Bonus: "Beat your feet in the Mississippi mud"

Social Security Blues: 2012 Shaping Up to Be a Third Consecutive Deficit Year

Financial blogger Bruce Krasting produced the above chart to go along with an article he wrote this past week entitled, "Social Security - January 2012 and Beyond," about the current account deficit in the Social Security program and what is likely in store for it in the next few years. Krasting's findings basically support exactly what I've written here several times, namely that the Social Security "trust fund" is nothing more than an accounting gimmick and that Obama's payroll tax holiday is hastening the program's ultimate demise.

Krasting thus concludes:

If we experience a recession in 2013, and the Fed maintains its low interest rate policies, it will be a very bad year for SS. The cash deficit would explode under these conditions. It could easily exceed $100b. The wheels will come off of SS’s cart. As we are seeing now, it is extremely difficult for SS to bounce back in good times. it will be impossible if we hit another economic slow patch.

This is precisely the scenario I’m anticipating for 2013. It will be a decisive year. If we end up going down an economic road as I have described, then SS will fall into full deficit (operating cash deficit + interest income). That would happen circa 2015. The Social Security Trust Fund is forecasting this event but it believes it will happen in 2021. When people realize that the Trust Fund has topped out, and the implications are understood, significant changes at SS will follow.

Krasting is somewhat less alarmist than I am, and being a big shot investor type he doesn't come right out and say what needs to be said: that anyone under the age of about 50 expecting Social Security to be there when they retire, or anyone older than that expecting Social Security to last much beyond another decade or so, needs to seriously reconsider their thinking.


Bonus: I would like to dedicate this song (and its REAL meaning) to the Social Security program