PEW Research Group Findings on Impending Bankruptcy

The PEW Research Center recently published ten charts showing how the United States has gone from a budget surplus nation into a debtor nation facing bankruptcy. Some of the assumptions are debatable, such as the Bush tax cuts costing the federal treasury revenue, but the inescapable facts are plain for every citizen to see. Simply put we have spend beyond our means and we have to choose a long drawn out deleveraging process that could take decades, or bankruptcy and reorganization.

Joseph N. Pew, Jr., founder of the PEW Research Group

The first chart perpetuated the myth that the Bush tax cuts of 2001 and 2003 cost the United States treasury $3.5 trillion in revenue. According to the US Department of Commerce tax collections from July 2001 were $1.8949 trillion and dropped to $1.8274 trillion by July 2003, reflecting the recession after 9-11, but increased to $2.6515 trillion by July 2007. A increase of 39.9% from 2001 or 6.7% annually. Tax collections during this time reflect the overall economy, tax cuts did not “cost” the treasury anything. As has been shown on several occasions when tax rates increase people and corporations change their behavior to avoid taxes.
This is also reflected in the taxes collected as a percentage of the GDP. From 19.5% collected in 2001 there was a drop to 16.2% in 2003 and a increase to 18.5% in 2007. This was not as spectacular as the 2000 tax collection number of 20.6%, under a balanced budget, but federal consumption of the GDP was only 18.2% in 2000. In 2007 that number had increased to 19.6% of GDP, a 7.7% increase. This means that 7.7% of the economic activity was taken out of the private sector that produces economic growth, and tax revenues, resulting in fewer taxes collected and jobs created. PEW fails to take into account this crowding out affect.
18.5% is very respectable when compared to the dismal 14.4% collected with the same tax code under Obama. Federal consumption of the economy as measured as a percentage of the GDP is at 25.3%.
Chart two breaks down the $12.5 trillion shift from 2001 to 2011 into a pie. Brief highlights include $1.262 trillion for the wars in Afghanistan and Iraq, $1.386 trillion on interest on new legislation, and $726 billion on the 2009 Recovery Act.

PEW Chart 1 showing budget projections
The third chart gives the severity of the unemployment problem, the percentage of unemployed out of work longer than a year has hit a post WWII high of 31%, but no explanation as to why.
My simplistic explanation as to why is the size of the federal government. Of course there were free trade agreements, welfare reform, wars, tsunamis, and a infinite amount of other factors affecting unemployment but from the numbers it is plain to see that there is a inverse relationship between the size of the federal government and employment.
In 1993 the federal government consumed 21.4% of the GDP and the Civilian Labor Force Participation Rate (CLFPR) was 66.3%. By 2000 federal consumption of the GDP had fallen to a 34 year low of 18.2% and the CLFPR had risen to an all time high of 67.1% for the year. Since 2000, with the exception of the housing boom years of 2003-07, the CLFPR has declined to an estimated 64% for 2011 and federal consumption has risen to a 66 year high of 25.3% of the GDP. The last time the federal government spent this much of the GDP was WWII.
Why would we expect employment to increase when the federal government removes resources from the productive private sector and wastes the resources on bridges to nowhere and corporate welfare schemes like Solindra. If the $553 million loan was removed from the federal government and given to private investment firms the resources would have been allocated in a much more efficient manner and the workers would be producing products that were profitable, and more importantly, these workers would still be employed. With the federal government misallocating resources to Solindra, and others, the workers at these facilities end up unemployed and producing nothing for society. Some call it crony capitalism and others fascism.

Federal Revenue increased after the 2001 and 2003 Bush tax cuts.

Graph four shows the spending increases and tax collection as a percent of the GDP. These numbers can be obtained from the White House Historical Tables.
Chart five is budget projections through 2021. What should interest seniors is that PEW and others look at publicly held debt or “hard” debt. These numbers dismiss “soft” debt or debt owed between government agencies. This soft debt would include Social Security IOU’s. In other terms when the financial tsunami comes those billions in Social Security IOU’s will be worthless pieces of paper suitable for history lessons and wall paper.
Currently the “hard” debt is 62.3% of GDP in 2010. Generally 60% or below is considered “sustainable.” So if the “soft” debt, Social Security, is added into the equation our 99.2% debt is unsustainable? Pew does not address this.
PEW also ignores our total public/private debt of $54.5 trillion or 364% of GDP. Wall Street investment firms consider anything above 250% as 100% assurance of bankruptcy.

PEW Chart 3 showing long term unemployment at post WWII records

Chart six shows that if federal spending continues to grow with GDP growth rates the debt will exceed the 60% solvency number and climb to 81% by 2021.
Chart seven shows that if entitlement programs are not addressed discretionary programs will have to be cut 46% starting in 2013 to meet the goal of a 60% debt to GDP ratio by 2021.
Chart 8 shows that with the current “Automatic Sequester” law or the super committee of 12 members of Congress will have to cut $454 billion out of defense over the next decade. 70% of the cuts will come from discretionary spending and none from Social Security and no more than 2% per year from Medicaid.
Chart 9 looks at optimistic debt ceilings of $16.4 and $16.7 trillion assuming interest rates remain relatively stable. With a public debt of $14.34 trillion any inflation surge causing the Federal Reserve to abandon its official policy of virtually zero interest on the Federal Funds rate will torpedo these projections. Currently the federal government pays a very reasonable 9% of the budget on interest payments. If interest rates, and inflation, increase this number will increase.

The Civilian Labor Force Participation Rate at a 27 year low while government spending as a percentage of the GDP is at a 66 year high of 25.3%

Chart 10 estimates that with the American Jobs Act the debt ceiling would be reached by October 2012 or August 2013.
Looking at the ten charts in aggregate it is clear that the United States is, at best, facing severe debt deleveraging problems. PEW correctly shows that if current policies and recommendations are followed there is a very real possibility that we will be WORSE off a decade from now with our national debt. This assumes economic growth, inflation stability, and interest rate stability.
The bottom line is Americans need to realize that no matter which group crunches the numbers they all come up bad for today’s young people. We have to come to grips that the federal government, entitlement programs, personal debt, public debt, will destroy America.
Do we go through years, possibly decades of debt deleveraging?
Do we sit down and discuss bankruptcy?
Do we saddle our children with an impossible debt?

PEW Chart 2

How do we humanly end entitlement programs and convert to private accounts?
We need to decide what direction we want to pursue. We can become slaves to debt as our politicians would desire. They, and the rich, own the debt. Getting the people to pay the debt has always been the goal of the elites, a financial form of slavery started by Alexander Hamilton.
Or do we stop playing their game, walk away from the debt, and restrict the power of the federal government to collecting no more than 11% of the GDP in taxes?
The founding fathers made their choice for limited government.
Choose wisely.