My Kids’ Future

Heard a scary story the other day. Davies 30:00 

When interest rates rise back to their accustomed levels all tax revenues will soon be needed just to pay the interest on today’s $16 trillion Federal debt. No money left over for Social Security, Defense, Medicare, Medicaid, etc.

This is a direct result of a rolling debt scam run by the Feds: issuing new loans to pay the principle and interest on old loans. Folks in the private sector go to jail for this. The reason these Ponzi schemes are illegal for anyone but the politicians is the music eventually stops and many are left without chairs. That would be your kids and mine.

Here’s how to unravel this mess. For good.

Contents

  1. My Kids’ Future
  2. 4 x GDP ÷ Debt
  3. Definitions
  4. Q&A
  5. How to Bankrupt a Government
  6. Conclusion

4 x GDP ÷ Debt

Enact an annual spending limit of 4 x GDP ÷ Debt. Today that’s $4 trillion in spending authority (4 x 16 / 16).

It’s a flexible spending limit. Pay the debt down to zero and spending is limited only by tax revenues collected. Grow GDP and you grow spending authority.

When times are good and tax revenues are plentiful Congress must first pay down the debt before it can spend more.

When times are tough and tax revenues are scarce Congress can issue more debt, but only up to a point. The more debt issued the lower the spending authority.

The excuse the Feds give for the size of the debt is that the economy will grow so the music need never stop. This proposal makes sure there are always enough chairs.

Illustrative Calculation

Today’s baseline is $4 trillion in spend, $16 trillion in debt and $16 trillion in GDP.

When times are good Congress can pay down debt to free up additional spending authority. GDP rises to $20 trillion and Congress pays down $2 trillion in debt to a balance of $14 trillion. It’s spending authority increases to $5.7 trillion (4 x 20 / 14). Congress can spend $5.7 trillion per year as long as the good times last (i.e., tax revenues keep flowing).

When times turn tough Congress can issue ~$1.2 trillion in new debt and still have room in the equation to spend the $1.2 trillion (4 x 20 / 15.2 = ~$5.2 spending authority). But only once. And only if they paid down the debt when times were good (i.e., instead of passing a tax cut).

To spend more you need to significantly raise taxes. No more spending without first paying down debt to free up further spending authority.

Definitions

Precise definitions of Spend, Debt and GDP are crucial to the success of this proposal. Politicians can be very clever at these number games. For example, they can figure out how to spend money on their pet projects and make it look like a reduction of debt.[1]

Establish a bipartisan Authority to protect these precise definitions. The mandate of the Authority is to ensure the intent of this proposal is secured at a very detailed level (at the level of individual financial transactions).

Pay close attention to the Federal Reserve. Banking is particularly troublesome since its logic is often left-handed in a right-handed world.

* * * * *

Note: the rest of this section is quite technical. You can skip to Q&A but keep in mind the technical details are just as important as the equation. Any small leak in the dam and you’ll soon see the entire budget bursting through a massive rupture.[2]

Spend

All Federal spend is created equal. If money or goodies go out the door or are promised to do so, then it’s probably spend (the key exception being money or goodies used to legitimately pay down debt or lease contracts).

Spend includes emergency spend, Social Security, Medicare, etc. No categories of spend are exempt. No exemptions for spending by off-budget programs  or off-budget enterprises (e.g., Fannie Mae and Freddie Mac). Spend includes commitments, obligations and expenditures. It includes contingencies. Spend includes all interest payments and their ilk (e.g., dividends). It includes spend for the NSA, CIA and any other off-the-book spooks.

Spend is calculated to include the full multi-year cost of programs in the current year budget. Appropriations for multi-year programs are totaled and subjected to current year spending limits.[3]

Spend includes inter-agency spend and inter-governmental spend (e.g., block grants, payments on behalf of states, territories or foreign governments). There is no relief to the spending limit even when spend results in a debt owed to the Federal government.

Spend includes all prepaid expenditures. Spend includes current year lease payments.

Spend includes sales of Federal assets or leases (e.g., leasing off-shore oil drilling rights).[4]

Cash or goodies coming in the door are never to be booked as negative spend (e.g., misc. revenues, unused appropriations, debt repayments, investment dividends). Appropriations in general are not transferable to other purposes (definitely not across Agencies).[5]

Spend includes any commitment, obligation or contingency that pays back in the future for benefits received in the present. For example, spend includes getting the Saudis to fund the Contras in Nicaragua by promising to buy their oil at a premium price in the future.

We value all spend-like financial transactions assuming worse case scenarios.

Debt

All Federal debt is created equal. If money or goodies come in the door with strings attached then it’s probably debt (the key exceptions being the payroll tax and Medicare payments).

Debt refers to loans, bonds or their ilk issued by the Federal government or its entities: Federal Reserve, Treasury, Agencies, Administrations, Authorities, Foundations, Institutes, Boards, Government Corporations, Foundations, Commissions, etc. (see here ). This includes debt for the NSA, the CIA and any other off-the-book spooks. It includes industrial revenue bonds. No categories of debt are exempt.

Debt includes debt guarantees or swaps of public for private debt (e.g., TARP).

Debt includes all loans issued by any private, commercial or public entity (e.g., loans issued by Fannie Mae or Freddie Mac), when that loan contains implicit or explicit Federal authorization or backing.

Debt includes inter-agency debt and inter-governmental debt (e.g., States or territories, foreign governments).

Debt includes all future lease payments (net of current year lease payments which are consider spend).

Debt includes totals for each step in a rolling debt scheme.[6]

No negative debts (or netting of debts) are allowed (e.g., prepaid expenditures, funds appropriated for the multi-year costs of a program, debts owed to the Feds from other public or private entities).

Debt includes any commitment, obligation or contingency that pays back in the future for benefits received in the present. For example, debt includes getting the Saudis to fund the Contras in Nicaragua by promising to buy their oil at a premium price in the future.

We value all debt-like financial transactions assuming worse case scenarios.

GDP

I do not know enough about the calculation of GDP to comment on how to best protect its integrity. Perhaps readers have insights?

Use a three year rolling average of GDP to temper draconian cuts during a recession and profligacy during economic booms.

Q&A

Q. How’s this different from a debt ceiling?

It eliminates Debt ceiling shutdowns. The Republicans will eventually regain control of Washington DC and will be pressured by hard core partisans to unilaterally cut the debt ceiling and force dramatic cuts to Federal spending. This proposal eliminates that threat.

Debt grows with GDP. Recall the equation: 4 x GDP ÷ Debt. Grow GDP and you can increase levels of debt to a degree (i.e., the more you increase debt the less you can spend it).

Pay down debt during boom times and you can raise debt during slumps as shown in the illustrative calculation above.

Q. How’s this different from a deficit reduction?

Deficit reduction allows greater spending with greater tax revenues. This proposal does not. Greater tax revenues in this proposal cannot be spent without first freeing up spending authority, which means first paying down debt.

Q. How does this avoid the opening scenario of this blog entry?

It greatly limits the ability to use further debt to pay interest on existing debt. Interest payments are counted as ‘spend’ and are subject to spending limitations.

Q. Why these particular variables in the equation (4, GDP, Debt)?

We need an equation that ties spending to debt reduction. Debt needs to be in the denominator of the equation.

We need an equation that allows for increased government services as the economy grows. GDP seems a reasonable candidate to use in the numerator of the equation. It allows spending when the economy’s good and restricts spending when the economy’s bad.

Coincidentally Debt and GDP are now approximately equal (GDP/Debt=1), so the multiplier is merely the current annual spend of the Federal Government (~$4 trillion). The multiplier can be higher or lower depending on negotiations during enactment of this proposal.

But once chosen the multiplier must be set in concrete. The multiplier provides the discipline needed to stop the rolling debt scheme. In a sense it defines a new debt ceiling. You can’t add players to the game of musical chairs without first adding a few more chairs.

Q. Politicians will resort to manipulation of debt or lease contract terms to get around the spending limit.

Trickery with contract terms (e.g., reducing debt principle by raising future interest rates) will be tightly controlled in the definitions for the spending limit. For example, we would amortize the value of any changes to contract terms thereby raising debt levels back to their original amounts.

Rolling debt schemes (e.g., increasing future interest rates to lower current interest payments) will be tightly controlled.

Q. Politicians will resort to greater levels of hidden spend.

Yep. Here’s a (partial) plug for that leak. Don’t forget to plug the leaks in the tax code (here).

Q. Congress will not pay down the debt when times are good. They can’t spend more but they can enact tax cuts.

During the next economic boom enact temporary legislation tying tax cuts to debt reduction if you’d like.

Find a way to reward legislators who push for debt reduction over tax cuts. I propose a tool for reducing debt available to all legislators. It will be up to voters to reward them for its use.

We could lower the GDP multiplier (4) when times are good to increase debt reduction. But that would lead to calls to raise it when times are tough. Best we leave it fixed and slowly outgrow our debt problem over time.

Q. The spending limits imposed by the equation are too stringent to allow for the massive spending we needed, for example, to deal with the 2008 economic crisis. The government needs “maximum flexibility”.

Not sure we ‘needed’ the amounts spent during the 2008 crisis. But maximum flexibility means out‑of‑control spending. I allow for quite flexible spending but within the constraints of debt discipline. Assuming Congress pays down debt during the good times instead of enacting tax cuts there will be enough flexibility in the equation to respond to even a severe economic downturn. In the event of a WWIII crisis Congress can always muster a super majority to temporarily suspend its spending limits.

Q. Okay maybe not “maximum flexibility”. But in your example Congress only gets one shot to increase debt during a crisis and then they must start taxing.

How many shots would you like? Perhaps better minds than mine can come up with a way to force Congress to husband even more funds during good times to prepare for the bad. I don’t see it happening in a nation split 50-50 between advocates for Big Government vs. small government. This is the best chance you’re likely to get to stop the accelerating growth of Federal debt.

Q. You don’t distinguish spend from investment — even those fully paid for with additional revenues.

Politicians “invest in our future” by committing identity theft. If it’s true they are investing in my future then why don’t they come to me and ask for the money? Instead they steal my credit card. They sign my name to the charge slip to pay for their “investment”.

Pay the debt down to zero and there is no spending limit. As long as you have tax revenues you can invest to your heart’s content. My dream would be to bequeath a profitable investment portfolio to my great grand-kids. Investments are counted as “spend” but when there’s no debt there’s no spending limit and therefore no limit on investments.

If spending authority is tight and your investment is likely to be profitable then you should have no problem delaying something else in the budget since your investment can be used to pay down debt to increase spending authority.

Note: when you call something “additional revenue” this is not “negative spend”, a transaction type expressly prohibited under this proposal.

Q. You twist common conceptions of the accounting rules, for example booking an asset sale as spend.

I can come up with ‘logic’ for each of my accounting definitions. For example oil drilling rights are not just sitting on the Federal books waiting to be sold. So at the point of sale I first ‘purchase’ those rights from the American people (spend) and then sell them (revenues). But that’s not the point. We seek a new set of ‘accounting rules’ for this proposal which stop the games and are consonant with the spirit of the proposal, which is debt management.

When the accounting treatment for a financial transaction is ambiguous we select answers that improve debt management. So for example refunds of spend are counted as revenue and not negative spend. We institutionally skew accounting treatments away from negative transactions (e.g., negative spend or debt forgiveness).

Q. Obliging Congress to include the full multi-year cost of programs in the current year budget will discourage investments providing long-term benefits for the nation.

Without this limitation Congress can commit more future spending than may fit within future spending limits. They’ll be tempted to set in concrete future commitments consistent with current majority priorities. No. There’s enough slop in the budget to fully fund all programs truly requiring a multi-year appropriation of funds.

The idea is to set aside (appropriate) funding only far enough into the future so a program can prove its worth. Later funding then has a political base to push for continued funding as part of the ongoing annual budget process.

Q. We’ll have to shut down the Mars Rover because there’s no room in the equation for its continued operational support. This is a waste.

This is gaming the system. You should have requested appropriations for the full lifetime operations of the program. It’s quite clear NASA plays games with the numbers and expected these Mars rovers to last far beyond their ‘official’ mission lifetime. We can allow no exemptions to the equation for any reason. They’ll cascade and completely undermine the intent of the proposal.

Q. The budget recorded surpluses and reduced debt for four consecutive years in the 1990s without a spending limit.

Hardly touched the debt. Four years out of 40 is not an impressive record. And our debt crisis has turned critical. This is not a balanced budget proposal. Tax revenues (surpluses) are not part of the equation. This is a proposal for a flexible spending limit designed to keep Federal debt accumulation in line with GDP growth.

Q. How does this proposal per se enforce the spending limit?

If we can’t get a constitutional amendment then protect the equation (e.g., changing the multiplier from 4 to 4.5) with a super majority provision in the legislation. It’s a pretty simple equation and the values within the equation can be protected (I believe) with just a small amount of political capital. It’s up to the voters to make sure elected officials don’t get away with pathetic, teary-eyed pleas for exemptions. This proposal is as per se as they come.

Q. This proposal doesn’t shrink the size of government.

Not my intent. I just want to get the debt under control (or eliminated). And this I do much better than a balance budget proposal. I force debt reduction before Congress can spend during boom times.

Asset and lease sales are considered spend and reduce available spending authority. Proceeds from these sales will also most likely go to debt reduction.

Q. This proposal takes away a major argument we must use to shrink the size of government (i.e., the size of debt argument).

Doesn’t seem to work. Voters get madder rather than gladder when government shuts down over debt ceilings. It’s unclear whether the threat of bankruptcy will lead to calls for a smaller or a larger government. The cost of 80 million baby boomers coming into Social Security and Medicare will be the definitive test.

I too prefer a smaller government but it seems quite immoral to plunge the global economy into chaos in order to achieve it. If only for that reason my spending limit proposal should garner a majority vote comprised of advocates for the current scope of government plus advocates for debt reduction.

Q. Corporations use debt. Why don’t you want the Federal government to use debt?

Investors can come and go in a corporation. Our grand-kids are stuck with the only Federal government we’ve got. Politicians spin the illusion they are investing into our future. Perhaps that’s true but their using our money to do it. You want to invest? Spend your own money. Build an aircraft carrier and we’ll lease it from you as we need it. This approach worked quite well for Rome during the first Punic wars with Carthage.

How to Bankrupt a Government

  • Pile up debt while interest rates are low using new debt to pay interest on the old
  • Install a Federal Reserve board that considers inflation as enemy number one
  • Maintain huge trade or monetary deficits to devalue the dollar putting upward pressure on interest rates
  • Proliferate tax breaks in the tax code to reduce federal revenues (here)
  • Vote 51% for politicians gifted in “the art of spend” and 49% for politicians gifted in “the art of no new taxes”
  • Keep telling voters you will never touch their social security or medical benefits
  • Wait ten years (2½ presidential terms).

Sound familiar?

Conclusion

What if you found out someone stole your identity and was on a wild spending spree? Doesn’t matter if you’re frugal and stick to your budget. The politicians stole your credit card and are signing your name to their charges.

Pass the My Kids’ Future Act of 2014. Enact a spending limit of 4 x GDP ÷ Debt. Establish a bipartisan Authority to make sure it sticks. No new spend until the debt is paid down.

Armageddon. 80 million baby boomers pour into Social Security and Medicare over the next 6-10 years. An additional $3-4 trillion per year in spend on top of today’s $4 trillion.

You want to raise taxes Mr. Congressman? I’ll adjust my personal budget. But only once you show me you cut up my stolen credit card. Otherwise forget it.


1. Discount the sale of off-shore drilling rights to Schlumberger in such a way that the Saudis forgive debt we owe them in exchange for discounts they’ll receive from Schlumberger for its drilling equipment and services: immediate debt relief, increased spending authority and reduced drilling royalties to the U.S. Treasury over the coming decades. Drill Baby Drill!

2. If this proposal gains traction you can be sure lobbyists from K Street will focus all their efforts on the definitions. These definitions will proliferate and obfuscate to the point where the equation becomes as indecipherable as the current budget process (or the tax code).

3. We avoid the game where Congress funds a zero tolerance drug law without considering the spending authority needed to fund its enforcement in later years. Multi-year appropriations are considered “spent” in the current year. There will be no spending limit relief for unused appropriations (i.e., no negative spend transactions).

4. This is viewed as spending our kids’ patrimony. When you sell land (or any government asset) and receive $1 billion, this gets booked as $1 billion in spend and $1 billion in receipts. Since this counts as spend you end up with $1 billion less in spending authority. If debt levels are high you won’t have room in the remaining spending authority to use the $1 billion in receipts. It is best to allocate this $1 billion to debt reduction.

5. It would be great to include a Qui Tam aka Whistleblower provision in this legislation to reward bureaucrats who uncover unauthorized re-appropriations of funds.

6. For example, the Chinese government is running a multi-trillion dollar rolling loan scheme in their state-owned corporations (i.e., A loans to B loans to C loans to A, then iterate). Ref With this proposal we would total up all the separate loans in these schemes for inclusion in the Federal debt total. For a colorful illustration of this scheme in reverse see Encino.
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