BA Spending Daily September 17, 2012

“The Magnitude of the Mess We’re In”
George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor editorialize in the Wall Street Journal, “Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear. Where are we now? Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household. The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up. … Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.”

After $5B Loss for USPS, Reforms Still Unlikely Before Elections
According to The Hill, “Lawmakers are conceding that an overhaul to the struggling Postal Service won’t be enacted before November’s elections – and that any reforms passed this year may not be as sweeping as originally sought. With Congress set to skip town again in a few days, the House has yet to vote on its postal reform bill, despite suggesting it would it take it up over the summer. … The back-and-forth comes as the Postal Service lost more than $5 billion in the third quarter of fiscal 2012. Postmaster General Patrick Donahoe, who has said that USPS needs to cut $22.5 billion from its annual costs by 2016, has been calling for months for Congress to quickly finish up its work on postal reform.”

White House Details Spending Cuts in Report
According to the New York Times, “Army operations and maintenance would lose nearly $7 billion next year, and the Navy more than $4 billion under a looming series of automatic cuts in federal spending. Educational achievement and special-education programs would be shaved by $2.3 billion. Medicare payments to hospitals would fall by $5.6 billion. And, particularly relevant at a moment when world attention is focused on the continuing attacks on United States embassies and consulates abroad, diplomatic programs and embassy security would lose $1.2 billion. These are among the findings in a new 394-page report by the White House that was delivered Friday to Congress, detailing line by line what will happen next year if Washington fails to act to head off about $100 billion in military and domestic spending cuts scheduled to begin Jan. 2. … The Budget Control Act of July 2011 established automatic cuts as the bludgeon that was supposed to force a special bipartisan committee to reach an agreement on deficit reduction of at least $1 trillion over the next decade. The committee failed, with Republicans refusing to meet Democrats’ demands to raise taxes in exchange for cuts to domestic programs and entitlements like Social Security and Medicare. Lawmakers still hope that Congress and the White House can come up with a way to avoid the cuts, but nothing will happen before the November elections, whose outcome will have some effect on what any future agreement would look like.”

Confrontation in Chicago Teachers’ Strike Escalates
Reuters reports, “The confrontation between Chicago teachers and Mayor Rahm Emanuel escalated on Sunday when their union extended a strike and the mayor said he would go to court to block the walkout, risking more friction within President Barack Obama’s political coalition as the November 6 election nears. … The Chicago strike has shone a bright light on a fierce national debate over how to reform failing inner-city schools. The union believes that more money and resources should be given to neighborhood public schools to help them improve. … The agreement calls for a 3 percent pay raise for teachers this year and 2 percent in each of the next two years. If the agreement is extended for an optional fourth year, teachers get a 3 percent increase. The deal would result in an average 17.6 percent increase over four years, the district said. Chicago union teachers make an average of about $76,000 annually. The deal could exacerbate the Chicago Public Schools financial crisis. Emanuel said the contract will cost $295 million over four years, or $74 million per year. Debt rating agencies had previously warned that the new agreement with teachers could bust the school district budget and lead to a downgrade of its credit rating.”

California to Vote on $1B Tax Break for GM While Facing Higher Taxes
Bloomberg reports, “California lawmakers couldn’t bring themselves to end a $1 billion tax break for General Motors Co. (GM), Kimberly-Clark Corp. (KMB) and other multistate businesses, so now voters will decide.

If Proposition 39 is approved, as at least one recent poll suggests, corporations based outside California would lose an option that let some pay lower income taxes than those in-state.California, the most populous and most indebted state, has cut spending on schools and the poor to help erase a $15.7 billion deficit. Governor Jerry Brown is asking voters in November for higher sales and income taxes.”

“Ratings firm downgrades U.S. Credit”
CBS News reports, “Credit rating agency Egan-Jones is downgrading its rating on U.S. debt to AA- from AA, citing Federal Reserve plans to try to stimulate the economy. The firm said the Fed’s plans to buy mortgage bonds will likely hurt the economy more than help it. Egan-Jones said the plan will reduce the value of the dollar and raise the price of oil and other commodities, hurting businesses and consumers. ‘Up, up and away — the Fed’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality,’ Egan-Jones said in a report Friday, alluding to a third round of quantitative easing announced by the central bank Thursday. ‘Issuing additional currency and depressing interest rates via the purchasing of [mortgage-backed securities] does little to raise the real GDP of the U.S., but does reduce the value of the dollar…’ Egan-Jones said that, since 2006, U.S. debt as a ratio of GDP had grown to 104 percent, from 66 percent. By comparison, Spain’s debt-to-GDP ratio of 68.5 percent, the firm added.”

Are Voters Paying Attention to Jobs Numbers?
The Associated Press reports, “The government’s monthly jobs report has become Washington’s most anticipated and studied economic indicator, pounced upon by politicians, economists and journalists for snap judgments as the presidential election nears. But in the real world, most everybody else just looks around and figures things out for themselves. Is that steel plant closing? Are Ford or General Motors rehiring? How much are those groceries? What’s a full tank of gas going to run me? How much is our house worth? … These are the kinds of questions economists and pollsters say are on people’s minds more than government statistics. ‘People are not looking at these government reports to decide how the economy is doing, or how well they or their neighbors are doing. They know from their own daily experience,’ Democratic pollster Mark Mellman said.”

U.S. Health Care System Wastes About $750B A Year 
Bankrupting America writes, “A recent report from the Institute of Medicine reported that the U.S. health care system annually wastes 30 cents out of every dollar spent. How much does that work out to in total? About $750 billion a year. While the report did not provide a blueprint for policy makers to make appropriate changes, all of these costs have the potential to be minimized through better incentives and more efficient medical practices. Not all health care costs in the U.S. fall directly on the individual taxpayer, but considering 20 percent of the federal budget accounts for Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), combatting the waste that exists in the health care system would be a significant step in reducing the budget deficit without necessarily reducing health care benefits. Click here to see the report’s breakdown of the six areas where major waste was identified in the health system.”

“Hollow Promises” on the Deficit
The National Journal looks at the “hollow promises” and the lack of details being provided by the presidential candidates in either party on their plans to reduce the deficit.  Nancy Cook writes, “Here’s the big secret about the presidential campaign: No one has a good plan to fix the deficit over the next decade. Not President Obama, whose $4 trillion deficit-reduction proposal leaves intact the entitlement programs—the biggest drivers of the country’s rising debt, as they mushroom from about 8 percent of gross domestic product in 1970 to a projected share of nearly 16 percent in 2022. And not Mitt Romney and Paul Ryan, who have a penchant for huge tax cuts that exceed the price tag of the spending cuts they’ve proposed. The deficit hawks, in other words, are not impressed.  … This leaves voters in the uncomfortable position of trying to decide which presidential ticket has the will to tackle the big problems. … So, which vague, lesser plan should Americans support?”

Bankrupting America Flashback:  Last month Public Notice released the results of a national survey of likely voters conducted by the Tarrance Group from August 19-23, 2012, which found that behind jobs and the economy, federal spending and debt, topped the list of key concerns, indicating that a message of fiscal responsibility will resonate with Americans. That desire was underscored by the fact that a majority of voters (67 percent) believe there needs to be either major (46 percent) or modest (21 percent) changes to Medicare, and solid majorities see a direct link between the debt and the health of the economy (67 percent) as well as that of their own family.  Click here to read more, and here to see the infographic.

Bankrupting America