Sunday, February 28, 2010

“Dear President Obama, Per Your Request ... “

An interesting health insurance reform proposal:

“Dear President Obama, Per Your Request ... “
By Brad Hessel and Madge Cohen
Published in The Motley Fool
February 24, 2010

"Build a Health Care Bill: We Can Do It Better Than Congress"

Build a Health Care Bill Content Index

Wednesday, February 24, 2010

Two Good Heath Care Articles

Below are links to two good articles that actually advance the health care debate.

"The Power of Small Ideas"
by Tevi Troy & Jeffrey H. Anderson
in National Review On-Line

"Cut Costs and Improve Care? That's True Reform"
by Regina Herzlinger and Eric Silfen
in National Review On-Line

"Build a Health Care Bill: We Can Do It Better Than Congress"

Link to the "Build a Health Care Bill" Idea Log

Tuesday, February 23, 2010

Does the Debt Matter? – Alternate Projections

In my earlier post "Does the Debt Matter? - Government Projections" I described how federal interest payments might be affected by an historical range of interest rates (from 2.0% to 14.0%) applied to the federal debt as currently projected by the Obama administration.

The Obama administration projections assume substantial growth in tax revenues averaging 12.5% each year for 2011 through 2014 and reductions in the growth of federal spending such that spending growth averages 2.9% over the same period. For the years 2001 through 2007, year over year actual increases in tax revenues averaged 3.7%. Average annual increases in federal spending were 6.2%.

The years 2001 through 2007 start during the “dot com” recession and end with the peak year just before the start of the current recession. They were not our country’s best years and they were not our worst. They were in fact typical; enough so that using their average figures as a guide seems reasonable.

If the 2001-2007 average spending increases and average revenue increases are projected into 2011 through 2014 you get the results shown below – a 2014 end of year federal debt of $21,276,966,800,464 ($21.3 trillion)

Using these projections of revenue and spending and therefore of 2014 debt; then applying the same range of historical interest rates we see the potential problem.

Under these conditions the interest payments consume the entire federal revenue at an interest rate of about 11.8%. Ten-Year Treasury Bonds exceeded this rate in 1981, 1982 and in 1984. We also approached it in 1980 and in 1983; and, we were over 10% in 1985.

Could it happen again? You bet your bootees it could

Quote of the Day
“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Ronald Reagan (1911 – 2004)

Link to Other Topics in the Special Report: Does the Debt Matter?

Tuesday, February 16, 2010

Does the Debt Matter? – Government Projections

At the end of the 2009 fiscal year (September 30th) the federal government debt stood at $11,875,900,000,000 ($11.9 trillion). It's bigger already. Just last week the legal debt ceiling was raised by another $1.9 trillion.

Official federal projections of spending, revenue, and end of fiscal year debt for 2010 through 2014 are shown below.

Assuming the federal government projections of spending & revenue for 2010 through 2014 are accurate (a very poor assumption in my opinion) the debt at the end of fiscal year 2014 will be $16,959,800,000,000 ($17 trillion). Using that figure and the federal projection of 2014 revenue (also a very poor assumption) the range of interest payments due on the debt based on the range of possible interest rates are:

One could say, “We’ll be fine" because the recent 10 year Treasury Bond rate was 3.26% and at that rate of interest the debt will be only 15.5% of projected 2014 revenue. Or, one could ask the question, “What will happen when (not if – when) interest rates go up?”

At the very least, one could expect an increase in the annual deficit equal to the excess interest payment. For example, if interest rates revert to the 48 year average of 6.89% then there would be excess interest due (above that due at 3.26%) in the amount of $597,045,398,958 ($0.6 trillion). The debt after paying the extra interest would be $600 billion higher than projected for that year.

This feels a bit like the credit card trap. You know, getting a low introductory rate on a credit card and maxing it out. Then, the bank raises the interest rate and you start making minimum payments. Then the bank raises your credit limit and you charge more. After a while you’re minimum payments on the card grow so high you have to stop going to the movies. Then, you have to stop eating out. Then you have to sell your car. Then… well, you get the picture.

Quote of the Day
“… I have to point out that government does not tax to get the money it needs; government always needs the money it gets.”
Ronald Reagan (1911 – 2004)

Link to Other Topics in the Special Report: Does the Debt Matter?

Tuesday, February 9, 2010

Does the Debt Matter?

Links to Topics in the Special Report: Does the Debt Matter?

Does the Debt Matter? - We Owe it to Ourselves
Does the Debt Matter? - Paying the Interest
Does the Debt Matter? - Government Projections
Does the Debt Matter? - Alternate Projections
Does the Debt Matter? - Questioning Assumptions

Does the Debt Matter? – Paying the Interest

As of September 30th, the end of fiscal year 2009, the official debt of the United States federal government was $11,875,900,000,000 ($11.9 trillion). The yield of the 10 year Treasury bond at that time was 3.26%; Using 3.26% as an estimate of the average interest rate results in an annual interest estimate of $387,154,340,000 ($0.4 trillion). That was 18.4% of total federal revenues from all sources in 2009.

This is a huge amount of money no matter how you cut it. But, it could be much worse. The 10 year Treasury bond yield since 1962 has averaged $6.89%. Below is the end of year yields for each year from 1962 through 2009.

Year - Yield of 10 Year Treasury Bond (%)
1962 - 3.95%
1963 - 4.00%
1964 - 4.19%
1965 - 4.28%
1966 - 4.93%
1967 - 5.07%
1968 - 5.64%
1969 - 6.67%
1970 - 7.35%
1971 - 6.16%
1972 - 6.21%
1973 - 6.85%
1974 - 7.56%
1975 - 7.99%
1976 - 7.61%
1977 - 7.42%
1978 - 8.41%
1979 - 9.43%
1980 - 11.43%
1981 - 13.92%
1982 - 13.01%
1983 - 11.10%
1984 - 12.46%
1985 - 10.62%
1986 - 7.67%
1987 - 8.39%
1988 - 8.85%
1989 - 8.49%
1990 - 8.55%
1991 - 7.86%
1992 - 7.01%
1993 - 5.87%
1994 - 7.09%
1995 - 6.57%
1996 - 6.44%
1997 - 6.35%
1998 - 5.26%
1999 - 5.65%
2000 - 6.03%
2001 - 5.02%
2002 - 4.61%
2003 - 4.01%
2004 - 4.27%
2005 - 4.29%
2006 - 4.80%
2007 - 4.63%
2008 - 3.66%
2009 - 3.26%

If interest rates return to the 6.89% average, annual interest payments on the federal debt would total $818,670,114,792 ($0.8 trillion) – 38.9% of total 2009 federal revenues.

Annual interest payments on the federal debt at a 10% rate would be $1,187,590,000,000 ($1.2 trillion) – 56.4% of 2009 revenue.

And, annual interest payments on the federal debt at a 14% rate would be $1,662,626,000,000 ($1.7 trillion) – 79.0% of 2009 revenue.

What would happen to the economy under these conditions? What would happen to federal government services?

Quote of the Day
“I can calculate the movement of the stars, but not the madness of men.”
Sir Isaac Newton

Link to Other Topics in the Special Report: Does the Debt Matter?

Tuesday, February 2, 2010

Does the Debt Matter? – We Owe It to Ourselves

President Franklin Roosevelt is supposed to have said that the size of the Federal debt didn’t matter because “we owe it to ourselves”.

Of course, he was right in a certain sense because at the time, individual Americans were buying and holding a wide variety of United States Treasury debt. Common citizens bought “War Bonds” and “Liberty Bonds” out of patriotism and a shared need to win World War II.

The debt, however, was owed by the corporate Federal government to each and every individual holder of US bonds. So, it wasn’t really “owed to ourselves”. The government was obligated to pay others and those others expected and depended on the government to honor the obligation.

Once, some years ago, I really did owe a debt to myself. I borrowed a sum from my 401k account so, in true FDR fashion, the size of the debt didn’t matter since I truly owed it to myself. Or did it?

My 401k loan didn’t have to be paid back. But, an unpaid 401k loan is treated by the IRS as a distribution. And, if you’re not yet 59 ½ years old, an early 401k distribution is levied a 10% surcharge on top of your normal income tax. So, if I failed to pay back my loan I would owe income tax on the unpaid balance with a 10% surcharge.

Beyond these costs, failure to repay the loan would mean the value of the loan would not be available to compound and grow my 401k account.

In the event, I partially repaid the loan. When I changed jobs the unpaid balance was due immediately but I didn’t have the money to pay it off. So, I allowed the balance of the loan - about $3,500 – to become an early distribution. I paid the income tax and the 10% penalty - a combined total of about $1,000.

The debt I owed myself turned out to matter quite a lot. It cost me $1,000 out of pocket and my retirement account will be lighter by about $61,000 ($3,500 compounded annually for 30 years at 10%). Worse, I don’t even remember why I took the loan in the first place.

Our current Federal government debt can’t be described as one that we “owe to ourselves”. A great deal of it is owed to foreign governments. And, unlike during World War II, few individual Americans hold government debt except thru pension funds and mutual funds.

Winning World War II was an overarching and clear justification for Federal borrowing. But, “We owe it to ourselves” was never a very good rationalization for increasing Federal debt. Today it makes no sense at all.

Quote of the Day
“We can evade reality, but we cannot evade the consequences of evading reality.”
Ayn Rand (1905-1982)

Link to Other Topics in the Special Report: Does the Debt Matter?